UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 COMMISSION FILE NO. 1-11993 MIM CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 05-0489664 (State of incorporation) (IRS Employer Identification No.) 100 CLEARBROOK ROAD, ELMSFORD, NEW YORK 10523 (914) 460-1600 (Address and telephone number of Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.0001 PAR VALUE PER SHARE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant as of March 1, 2002, was approximately $377.0 million. (Reference is made to the fourth paragraph of Part II, Item 5 herein for a statement of the assumptions upon which this calculation is based.) On March 15, 2002, there were outstanding 22,832,583 shares of the registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for its 2002 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the close of the registrant's fiscal year are incorporated by reference into Part III of this Form 10-K.
PART I ITEM 1. BUSINESS OVERVIEW MIM Corporation (the "Company" or "MIM") is a pharmaceutical healthcare organization delivering innovative pharmacy benefit, specialty pharmaceutical distribution and other pharmacy-related healthcare solutions to Plan Sponsors, principally managed care organizations ("MCOs")and third party administrators. The Company combines its clinical expertise, sophisticated data management and therapeutic fulfillment capabilities to serve the particular needs of each of its customers and respective benefit recipients covered by the customers' pharmacy related health benefit. The Company provides a broad array of pharmacy benefit and pharmacy products and services to individuals ("Members") receiving health benefits principally through health insurers (including MCOs) and other insurance companies, and, to a lesser extent, third party administrators, labor unions, self-funded employer groups, government agencies, and other funded health plan sponsors (collectively, "Plan Sponsors"). The Company's programs include the distribution of biotech and other high-cost prescription medications to the chronically ill and genetically impaired, the provision of pharmacy benefit management ("PBM") services to members of Plan Sponsors, and the distribution of prescription maintenance medications to Plan Sponsors' Members by mail service ("Mail Service"). All of the Company's programs include the provision of clinical pharmacy services designed to provide patients with high quality care while controlling pharmacy and overall healthcare costs. Depending on the goals and objectives of the Plan Sponsors with which the Company does business, the Company provides some or all of the following clinical services as part of its PBM and/or specialty pharmacy programs, all of which will be described below in greater detail: pharmacy case management, therapy assessment, compliance monitoring, health risk assessment, patient education, drug usage and interaction evaluation, pharmacy claims processing, Mail Service and related prescription distribution, benefit design consultation, drug utilization review, formulary management and consultation, drug data analysis, drug interaction management, patient compliance, program management and pharmaceutical rebate administration. Although a significant portion of the Company's revenues are now generated through the management and distribution of Specialty Pharmaceuticals to the genetically impaired and the chronically ill, the Company derives more than a majority of its revenues from the provision of PBM services. The Company believes that its future growth is directly linked to the success of its specialty pharmacy growth strategy and believes that within 24 months, a majority of the Company's revenues will be derived from the provision of specialty pharmaceutical management and distribution operations. SPECIALTY PHARMACY MANAGEMENT AND DISTRIBUTION Through its BioScrip(TM) specialty injectable therapy programs, the Company distributes high-cost pharmaceuticals and provides clinically focused case and disease management programs to Plan Sponsors' members afflicted with chronic illnesses or genetic impairments. The disease states or conditions for which the Company has specialty injectable programs include HIV/AIDS, oncology, hemophilia, multiple sclerosis, growth hormone deficiency, Gaucher's disease, rheumatoid arthritis, infertility, respiratory syncytial virus (RSV), hepatitis C, Crohn's disease and transplant. The Company's specialty pharmaceutical programs are marketed principally to Plan Sponsors in order to control the high cost trends associated with medications for the chronically ill and genetically impaired. As part of a bundled offering, the Company distributes prescription products to Plan Sponsors' Member's and clinically manages each Member's condition from a pharmacoeconomic perspective. In other words, the Company attempts to maximize patient outcomes through strict adherence to the clinical guidelines or protocols for a particular prescription therapy. In adhering to the guidelines, the Company also attempts to minimize or control the costs associated with a Member's condition. The Company also distributes high-cost injectable and infusion prescription medications and provides clinical management services to patients through its Vitality Home Infusion Services, Inc., d/b/a Vitality Pharmaceutical Services ("Vitality"), subsidiary, acquired in January 2002, located in Roslyn Heights, New York. While BioScrip is marketed exclusively to Plan Sponsors, Vitality markets its products and services to physician practice groups, hospitals, and, in some cases, directly to patients. Through its American Disease Management Associates L.L.C. ("ADIMA") subsidiary located in Livingston, New Jersey, the Company distributes and administers high cost specialty infusion therapies to patients requiring principally immunosuppression blood products, such as IGG, parenteral nutrition products, such as TPN, and antibiotic therapies such as rocephin or vancomycin. Unlike the Company's other specialty programs, patients being serviced through ADIMA have their therapies administered by IV certified nurses. 2
Unlike many of the Company's competitors, which focus on particular pharmaceutical products within a limited number of chronic disease states, the Company offers numerous products within a larger number of disease states, since it is attempting to control a Plan Sponsor's overall pharmacy and medical expenditures in the most clinically appropriate manner. In contrast, many of the Company's competitors focus on increasing the market share of a particular product and increasing profitability through its relationship with the manufacturer of that particular product. The following services are available through the Company's Specialty programs: PHARMACY CASE MANAGEMENT ("PCM") - The Company provides Plan Sponsors' Members with access to the BioScrip pharmacy case management team ("PCM Team"), which is a specialized unit of skilled professionals including Pharmacists, Registered Nurses, Certified Pharmacy Technicians, Case Managers and Customer Service Representatives. The PCM Team is available via phone to both providers and patients, 24 hours per day, seven days per week. Each PCM Team member is cross trained in case management as well as individual disease states, in order to provide Plan Sponsors and its Members with a variety of basic services, including: PRIOR AUTHORIZATIONS - The Company, in conjunction with the contracted Plan Sponsor, develops effective criteria and protocols for the effective management of specialty pharmaceutical care. Criteria are reviewed prior to the onset of therapy to minimize incorrect prescribing, thereby reducing unnecessary cost. THERAPY ASSESSMENT - On-going monitoring of a Member's therapy is performed at disease specific intervals to assure adherence to therapy, desired response to therapy and any necessary interventions to enhance patient care. PATIENT ENROLLMENT - The PCM Team is the main point of contact for both physicians and patients during the enrollment process. PCM team members are responsible for identifying immediate patient needs, triggering important patient and physician mailings and following through on the enrollment process and delivery of the initial prescription. RISK ASSESSMENT - The PCM Team will engage all new patients in an initial assessment to determine the patient's knowledge level, self-care ability and non-compliance risk. Depending on the results of this assessment, patients are classified and an appropriate monitoring program is selected and administered. Patients are reassessed at appropriate times during their treatment as determined by the PCM Team. 3
EDUCATION. Each PCM Team member is trained in disease state management and treatment issues, and will be a valuable resource for both patients and physicians in answering treatment questions pertaining to such topics as side effects, self-administration and compliance issues. COMPLIANCE MONITORING. The PCM Team will collectively track the patient's progress and will initiate reminders, reinforcements and non-compliance alerts to both physicians and the patient. They are the catalyst for understanding compliance risks and taking action to coordinating the support necessary to maximize the patient's treatment. COORDINATED MEDICATION DELIVERY. BioScrip's pharmacy will provide express delivery of medications to the patient's point of service including a physician's office. Special handling techniques such as dry-ice packing are utilized in compliance with manufacturer's specified requirements. In addition to the injectable medication, BioScrip also provides Sharps containers, syringes and ancillary materials needed for administration of the product. Express delivery via overnight courier is provided without additional charge to the patient or physician. PHARMACY DATA SERVICES. The Company utilizes claims, medical and laboratory data to analyze and evaluate pharmaceutical utilization and cost trends to support our customers' understanding of such information through the generation of reports for management and Plan Sponsor use, and presentation of information vital to the Plan Sponsors' understanding of their particular pharmaceutical utilization and cost trends. These services include drug utilization review, quality assurance, claims and laboratory analysis. The Company has developed proprietary systems to provide Plan Sponsors with real-time access to pharmacy, financial, claims, prescriber and dispensing data. DISEASE MANAGEMENT. The Company designs and administers programs to maximize the benefits of pharmaceutical utilization as a tool in achieving therapy goals for certain targeted diseases. Programs focus on preventing high-risk events, such as asthma exacerbation or stroke, through appropriate use of pharmaceuticals, while eliminating unnecessary or duplicate therapies. Key components of these programs include health care provider training, integration of care between health disciplines, monitoring of patient compliance, measurement of care process and quality, and providing feedback for continuous improvement in achieving therapy goals. 4
PBM SERVICES The Company's PBM services offer small to mid-sized Plan Sponsors a broad range of services designed to ensure the cost-effective delivery of clinically appropriate pharmacy benefits. PBM services available to the Company's customers include the following: FORMULARY AND BENEFIT DESIGN. The Company offers to its clients customized, flexible formulary and benefit plan designs to meet their specific program requirements. Formulary design may assist in controlling program costs by focusing, to the extent consistent with accepted medical and pharmacy practices and applicable law, primarily on two areas: (i) generic substitution, which involves the selection of generic drugs as a cost-effective alternative to their bio-equivalent brand name drugs within a therapeutic category, and/or (ii) therapeutic interchange, which involves the selection of a lower cost brand name drug as an alternative to a higher priced brand name drug within a therapeutic category. Increased usage of generic drugs by Company-managed programs also enables the Company to obtain purchasing concessions and other financial incentives on generic drugs, which may be shared with Plan Sponsors. After a formulary has been established by a Plan Sponsor, rebates on brand name drugs are also negotiated with drug manufacturers and are often shared with plan sponsors. Many Plan Sponsors do not restrict coverage to a specific list of pharmaceuticals and are said to have "no" formulary or an "open" formulary that generally covers all FDA-approved drugs except certain classes of excluded pharmaceuticals (such as certain vitamins and cosmetics, experimental, investigative or over-the-counter drugs). As a result of rising pharmacy program costs, however, the Company believes that both public and private Plan Sponsors have become increasingly receptive to controlling pharmacy costs by restricting the availability of certain drugs within a given therapeutic class, other than in cases of medical necessity or other pre-established prior authorization guidelines, to the extent clinically appropriate. Once a Plan Sponsor decides to utilize a "restricted" or "closed" formulary, the Company actively involves its clinical staff with a Plan Sponsor's Pharmacy and Therapeutics Committees (which typically consists of local Plan Sponsors, prescribers, pharmacists and other health care professionals) to design clinically appropriate formularies in order to control pharmacy costs. The composition of the formulary is the responsibility of, and subject to the final approval of, the Plan Sponsor. The primary method for assuring formulary compliance on behalf of a Plan Sponsor is by controlling pharmacy reimbursement to ensure that non-formulary drugs are not dispensed to a plan member, subject to certain limited exceptions. Benefit design and formulary parameters are managed through a point-of-sale ("POS") claims processing system through which real-time electronic messages are transmitted to pharmacists to ensure compliance with specified benefit design and formulary parameters before services are rendered and prescriptions are dispensed. Over utilization of medication is monitored and managed through quantity limitations, based upon nationally recognized standards and guidelines regarding maintenance versus non-maintenance therapy. Step protocols, which are procedures requiring that preferred therapies be tried and shown ineffective before less favored therapies are covered, are also established by the Company in conjunction with the Plan Sponsors' Pharmacy and Therapeutics Committees to control improper utilization of certain high-risk or high-cost medications. CLINICAL SERVICES. Plan Sponsors' formularies typically identify a limited number of drugs for preferred status within each therapeutic class to be the covered drugs in order to treat most medical conditions appropriately. Provision 5
is also made, however, for coverage of non-formulary or non-preferred drugs (other than certain excluded products) when documented to be clinically appropriate for a particular patient. Since non-formulary drugs ordinarily are automatically rejected for coverage by the real-time POS system, the Company employs procedures to override restrictions on non-formulary medications for a particular patient and period of treatment. Similarly, restrictions on the use of certain high-risk or high-cost formulary drugs may be overridden through prior authorization procedures. Non-formulary overrides and prior authorizations are processed on the basis of documented, clinically supported medical information and typically are granted or denied within 48 hours after request. Requests for, and appeals of denials of coverage in those cases are handled by the Company through its staff of trained pharmacists and board certified pharmacotherapy specialists, subject to a Plan Sponsor's ultimate authority over all such requests and appeals. Further, in the case of a medical emergency, as determined by the dispensing network pharmacist, the Company authorizes, without prior approval, short-term supplies of all medication unless specifically excluded by a plan. DRUG USAGE EVALUATION. Drug usage is evaluated on a concurrent, prospective and retrospective basis utilizing the real-time POS system and proprietary information systems for multiple drug interactions, drug-health condition interactions, duplication of therapy, step therapy protocol enforcement, minimum/maximum dose range edits, compliance with prescribed utilization levels and early refill notification. The Company also maintains an on-going drug utilization review program in which select medication therapies are reviewed and data is collected, analyzed and reported for management applications. PHARMACY DATA SERVICES. The Company utilizes claims data to analyze and evaluate pharmaceutical utilization and cost trends to support our customers' understanding of such information through the generation of reports for management and Plan Sponsor use, and presentation of information vital to the Plan Sponsors understanding of their particular pharmaceutical utilization and cost trends. These services include drug utilization review, quality assurance, claims analysis and rebate contract administration. The Company has developed proprietary systems to provide Plan Sponsors with real-time access to pharmacy, financial, claims, prescriber and dispensing data. DISEASE MANAGEMENT. The Company designs and administers programs to maximize the benefits of pharmaceutical utilization as a tool in achieving therapy goals for certain targeted diseases, such as diabetes and asthma. Programs focus on preventing high-risk events, such as asthma exacerbation or stroke, through appropriate use of pharmaceuticals, while eliminating unnecessary or duplicate therapies. Key components of these programs include health care provider training, integration of care between health disciplines, monitoring of patient compliance, measurement of care process and quality, and providing feedback for continuous improvement in achieving therapy goals. As described more fully above under "Specialty Pharmacy Management and Distribution," many of these same tools are used by the Company in delivering specialty pharmaceutical services and products to patients afflicted with the chronic diseases managed by the Company. BEHAVIORAL HEALTH PHARMACY SERVICES. In recent years, Plan Sponsors, particularly MCOs, have recognized the specialized behavioral health needs of certain of its Members. As a result, many MCOs have segregated those afflicted with behavioral health issues into separately managed programs. The Company provides pharmaceutical-related services that encourage the proper and cost-effective utilization of behavioral health medication to enrollees within the segregated population within separate behavioral health organizations, which are traditionally (but not always) affiliated with that MCO. Through the development of provider education programs, utilization protocols and prescription dispensing evaluation tools, the Company is able to integrate pharmaceutical behavioral or mental health therapies with other medical therapies to enhance patient compliance and minimize unnecessary or sub optimal prescribing practices. These services are integrated into the Plan Sponsor's package of behavioral health care products for marketing to private insurers, public managed care programs and other health providers. PHARMACY DISPENSING FACILITY. The Company believes that program costs may also be reduced through the distribution of pharmaceutical products directly to Plan Sponsors' Members by the use of Mail Service programs through its pharmacy dispensing facility. The Company provides these Mail Service dispensing services from a new, fully automated fulfillment facility in Columbus, Ohio to Members typically receiving maintenance medications. The facility utilizes some of the industry's latest pharmacy technology currently available in the market place. This affords the Company and its Plan Sponsors the ability to reduce cost through the Company's Mail Service as compared to the more costly retail distribution of prescription products. CAPITATED BILLING ARRANGEMENTS In addition to traditional fee-for-service billing arrangements, the Company had historically offered capitated fee billing arrangements to its MCO customers. A capitated fee arrangement permits a Plan Sponsor to incur a fixed fee per member (a "capitated" program), which allows for cost shifting to the Company where aggregate PBM costs exceed pre-established per member amounts and a premium or greater financial benefit to the Company where costs are less than pre-established per member amounts. For 2002, the Company has remaining one material capitated arrangement with an MCO. The Company presently anticipates that capitated arrangements will represent approximately 6.8% of the Company's 2002 revenues. For the year ended December 31, 2001, approximately 21.2% of the Company's revenues were generated from capitated contracts compared to approximately 28.0% in 2000 while non-capitated business (including mail order services) represented approximately 78.8% and 72.0%, respectively. PROVISION FOR LOSS CONTRACTS Generally, loss contracts arise only on capitated 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 an MCOs' formulary 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 expected loss contracts and management does not believe that there is an overall trend towards losses on its existing capitated contracts. 6
SALES, MARKETING AND SERVICING The Company offers Plan Sponsors comprehensive pharmaceutical services that manage all aspects of a Plan Sponsor's pharmaceutical needs, including the specialty pharmacy services described above. The Company believes that its ability to offer a full line of services, including its specialty pharmacy products and services, provides it a competitive edge over its competition. The Company has also been successful in contracting to provide specialty pharmaceutical services, typically on a non-exclusive or preferred basis to Plan Sponsors, clinics, hospitals and physician groups not previously contracted with the Company for non-specialty PBM services. The Company markets its specialty pharmaceutical programs to MCO's without regard to the number of members, third party administrators, physician practice groups and hospitals. Unlike many of its competitors, the Company also markets these programs to other typically smaller pharmacy benefit managers, which do not have the same resources as the Company or which otherwise have determined not to develop independent specialty pharmacy operations. The Company markets its PBM services to small- to mid-sized public and private health plans and MCOs, typically having 400,000 or less members, self-funded groups, small employer groups, labor unions and third party administrators representing some or all of the aforementioned groups. The Company primarily relies on its own national sales force to solicit business from Plan Sponsors, as well as third party administrators and commissioned independent agents and brokers. As with all of the Company's products and services, the Company offers Mail Service programs in conjunction with PBM and specialty, pharmaceutical distribution programs. When offered in conjunction with its other programs, Mail Service may be subject to the target marketing focus of the PBM. When offered as a program without PBM services, the Company's Mail Service programs are offered to MCO's and other plans without regard to that Plan Sponsors size. THE TENNCARE(R) PROGRAM. Historically, a majority of the Company's revenues were derived from providing PBM services in the State of Tennessee to MCOs participating in the State of Tennessee's TennCare(R) program and behavioral health organizations ("BHOs") participating in the State of Tennessee's TennCare(R) Partners program. From January 1994 through December 31, 1998, the Company provided its PBM services as a subcontractor to RxCare of Tennessee, Inc. ("RxCare"). The Company and RxCare discontinued their relationship on December 31, 1998. The negotiated termination of its relationship with RxCare, among other things, allowed the Company to directly market its services to Tennessee customers (including those under contract with RxCare at such time) prior to the expiration of that relationship. The Company's marketing efforts resulted in the Company executing agreements with all of the MCOs for the TennCare(R) lives previously managed through RxCare, as well as substantially all third party administrators ("TPAs") and employer groups previously managed through the RxCare relationship. The TennCare(R) program operates under a demonstration waiver from The United States Center for Medicare and Medicaid Services ("CMS"). That waiver is the basis of the Company's ongoing service to those MCOs in the TennCare(R) program. The waiver expired on December 31, 2001 and was renewed without material modification through December 31, 2002. In addition, the State of Tennessee and the Federal governments have agreed to negotiate towards an additional two-year extension of the waiver through December 31, 2004. While the Company believes that pharmacy benefits will continue to be provided to Medicaid and other eligible TennCare(R) enrollees through MCOs in one form or another through at least December 31, 2004, there can be no assurances that such waiver will be renewed after December 31, 2002, that pharmacy benefits will continue under the TennCare(R) Program or that the MCO's currently being serviced by the Company will continue their respective relationships with it under the existing or a successor program or on the same or similar terms and conditions. If the waiver is not renewed and the Company is not providing PBM services and/or distributing specialty products to those lives under a successor program or arrangement, then the failure to provide such services could have a material and adverse affect on the financial position and results of operations of the Company. Moreover, should the funding sources and/or conditions for the TennCare(R) program change significantly, the TennCare(R) program's ability to pay the MCOs, and in turn the MCOs ability to pay the Company, could materially and adversely affect the Company's financial position and results of operations. COMPETITION The Company faces substantial competition within the pharmaceutical healthcare services industry. This industry includes a number of large, well-capitalized companies with nationwide operations, such as AdvancePCS, 7
Inc., Caremark Rx, Inc., Express Scripts, Inc., Merck-Medco Managed Care, L.L.C., MedImpact Healthcare Systems, Inc. and WellPoint Pharmacy Management as well as many smaller organizations typically operating on a local or regional basis. The Company also competes with several national and regional specialty pharmaceutical distribution companies that have substantial financial resources and which also provide products and services to the chronically ill and genetically impaired. These competitors include Accredo Health Inc., Chronimed, Inc., Gentiva Health Services, Inc. and Priority Healthcare Corporation. Some of the Company's competitors are under common control or ownership by brand name drug manufacturers or retail pharmacy chains and may be better positioned with respect to the cost-effective distribution of pharmaceuticals and/or the pricing of PBM services. Some of the Company's primary competitors have a substantially larger portion of the market share than the Company's existing market share. Moreover, some of the Company's competitors may have secured long-term supply or distribution arrangements for prescription pharmaceuticals necessary to treat certain chronic disease states on price terms substantially more favorable than the terms currently available to the Company. As a result of such advantageous pricing, the Company may be less price competitive than some of these competitors with respect to certain pharmaceutical products. However, as relates to its specialty programs, the Company does not believe that it competes strictly on the cost of particular products, rather it offers customers the opportunity to lower overall pharmaceutical and medical cost while providing high quality care. GOVERNMENT REGULATION GENERAL. As a participant in the healthcare industry, the Company's operations and relationships are subject to federal and state laws and regulations and enforcement by federal and state governmental agencies. Various federal and state laws and regulations govern the purchase, distribution and management of prescription drugs and related services and affect or may affect the Company. The Company believes that it is in compliance with all legal requirements material to its operations. In the second quarter of 2000, the Company entered into a global settlement agreement with the Office of Inspector General (the "OIG"), within the U.S. Department of Health and Human Services ("HHS"), and the State of Tennessee relating to certain civil and criminal charges brought against former officers of the Company's predecessor. The Company did not admit any wrongdoing in the global settlement agreement but agreed to enter into a corporate integrity agreement in order to ensure ongoing compliance with the requirements of Medicare, Medicaid and all other Federal health care programs. Under the terms of this agreement, the Company is required to, among other things, implement a corporate compliance program, conduct ongoing educational programs to inform employees regarding compliance with relevant laws and regulations and institute a formal reporting procedure to disclose possible violations to the OIG. In addition to these requirements, the Company must submit annual reports with respect to the status of its compliance activities. Although compliance with the corporate integrity agreement is designed to reduce the risk of violations of laws and regulations relevant to our business, the Company is required to report any such potential violations to the OIG and the U.S. Department of Justice. The Company is therefore subject to increased regulatory scrutiny and, if the Company commits legal or regulatory violations, it may be subject to an increased risk of sanctions or penalties, including exclusion from participation in the Medicare or Medicaid programs. The Company anticipates maintaining certain compliance related oversight procedures after the expiration of the corporate integrity agreement in June 2005. Among the various Federal and state laws and regulations which may govern or impact the Company's current and planned operations are the following: MAIL SERVICE PHARMACY REGULATION. Many of the states into which the Company delivers pharmaceuticals have laws and regulations that require out-of-state Mail Service pharmacies to register with, or be licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws of the state within which the dispensing pharmacy is located. However, various states have enacted laws and adopted regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located. To the extent that such laws or regulations are found to be applicable to the Company's operations, the Company would be required to comply with them. In addition, to the extent that any of the foregoing laws or regulations prohibit or restrict the operation of Mail Service pharmacies and are found to be applicable to the Company, they could have an adverse effect on the Company's prescription Mail Service operations. 8
Other statutes and regulations may also affect the Company's Mail Service operations. The Federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the products to be sold, to fill mail orders within 30 days, and to provide clients with refunds when appropriate. LICENSURE LAWS. Many states have licensure or registration laws governing certain types of ancillary healthcare organizations, including preferred provider organizations, third party administrators, and companies that provide utilization review services. The scope of these laws differs significantly from state to state, and the application of such laws to the activities of pharmacy benefit managers often is unclear. The Company has registered under such laws in those states in which the Company has concluded that such registration is required. The Company dispenses prescription drugs pursuant to orders received through its ScripPharmacy.com Web site, as well as other affiliated Web sites. Accordingly, the Company may be subject to laws affecting on-line pharmacies. Several states have proposed laws to regulate on-line pharmacies and require on-line pharmacies to obtain state pharmacy licenses. Additionally, federal regulation by the United States Food and Drug Administration (the "FDA"), or another federal agency, of on-line pharmacies that dispense prescription drugs has been proposed. To the extent that such state or federal regulation could apply to the Company's operations, certain of the Company's operations could be adversely affected by such licensure legislation. OTHER LAWS AFFECTING PHARMACY OPERATIONS. The Company is subject to state and federal statutes and regulations governing the operation of pharmacies, repackaging of drug products, wholesale distribution, dispensing of controlled substances, medical waste disposal, and clinical trials. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs and the dispensing of controlled substances. Federal controlled substance laws require the Company to register its pharmacies and repackaging facilities with the United States Drug Enforcement Administration and to comply with security, recordkeeping, inventory control and labeling standards in order to dispense controlled substances. State controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the state pharmacy licensing authority. Such standards often address the qualification of an applicant's personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its facilities. In general, pharmacy licenses are renewed annually. Pharmacists and pharmacy technicians employed by each branch must also satisfy applicable state licensing requirements. FDA REGULATION. The FDA generally has authority to regulate drug promotional information and materials that are disseminated by a drug manufacturer or by other persons on behalf of a drug manufacturer. In January 1998, the FDA issued Draft Guidance regarding its intent to regulate certain drug promotion and switching activities of pharmaceutical manufacturers that control, directly or indirectly, a PBM. The FDA has indicated that it does not intend to finalize the Draft Guidance. However, there can be no assurance that the FDA will not assert jurisdiction over certain aspects of the Company's PBM business, including the internet sale of prescription drugs. NETWORK ACCESS LEGISLATION. A majority of states now have some form of legislation affecting the ability of the Company to limit access to a pharmacy provider network or remove network providers. Such legislation may require the Company or its client to admit any retail pharmacy willing to meet the plan's price and other terms for network participation ("any willing provider" legislation), or may prohibit the removal of a provider from a network except in compliance with certain procedures ("due process" legislation) or may prohibit days' supply limitations or co-payment differentials between mail and retail pharmacy providers. Many states have exceptions to the applicability of these statutes for managed care arrangements or other government benefit programs, including Tennessee. LEGISLATION IMPOSING PLAN DESIGN MANDATES. Some states have enacted legislation that prohibits Plan Sponsors from implementing certain restriction design features, and many states have introduced legislation to regulate various aspects of managed care plans, including provisions relating to pharmacy benefits. For example, some states provide that members of a plan may not be required to use network providers, but that must instead be provided with benefits even if they choose to use non-network providers ("freedom of choice" legislation), or provide that a patient may sue his or her health plan if care is denied. Some states have enacted, and other states have introduced, legislation regarding plan design mandates, including legislation that prohibits 9
or restricts therapeutic substitution, requires coverage of all drugs approved by the FDA, or prohibits denial of coverage for non-FDA approved uses. Some states mandate coverage of certain benefits or conditions. Such legislation does not generally apply to the Company, but it may apply to certain of the Company's customers (generally, HMOs and health insurers). If such legislation were to become widespread and broad in scope, it could have the effect of limiting the economic benefits achievable through pharmacy benefit management. To the extent that such legislation is applicable and is not preempted by the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (as to plans governed by ERISA), certain operations of the Company could be adversely affected. Other states have enacted legislation purporting to prohibit health plans from requiring or offering members financial incentives for use of mail order pharmacies. ANTI-KICKBACK LAWS. Subject to certain statutory and regulatory exceptions (including exceptions relating to certain managed care, discount, group purchasing and personal services arrangements), Federal law prohibits the payment or receipt of remuneration to induce, arrange for or recommend the purchase of health care items or services paid for in whole or in part by Medicare or state health care programs (including Medicaid programs and Medicaid waiver programs). Certain state laws may extend the prohibition to items or services that are paid for by private insurance and self-pay patients. Management carefully considers the importance of such "anti-kickback" laws when structuring its operations, and believes the Company is in compliance therewith. Violation of the Federal anti-kickback statute could subject the Company to criminal and/or civil penalties, including exclusion from Medicare and Medicaid (including TennCare(R)) programs or state-funded programs in the case of state enforcement. The federal anti-kickback law has been interpreted broadly by courts, the OIG and administrative bodies. Because of the federal statutes broad scope, federal regulations establish certain safe harbors from liability. Safe harbors exist for certain properly reported discounts received from vendors, certain investment interest, and certain properly disclosed payments made by vendors to group purchasing organizations, as well as for other transactions or relationships. In late 1999, the HHS adopted final rules revising the discount safe harbor to protect certain rebates. Because this revision is fairly recent, the guidance on how the safe harbor revision will be interpreted is not fully developed. Nonetheless, a practice that does not fall within a safe harbor is not necessarily unlawful, but may be subject to scrutiny and challenge. In the absence of an applicable exception or safe harbor, a violation of the statute may occur even if only one purpose of a payment arrangement is to induce patient referrals or purchases. Among the practices that have been identified by the OIG as potentially improper under the statute are certain "product conversion programs" in which benefits are given by drug manufacturers to pharmacists or physicians for changing a prescription (or recommending or requesting such a change) from one drug to another. Anti-kickback laws have been cited as a partial basis, along with state consumer protection laws discussed below, for investigations and multi-state settlements relating to financial incentives provided by drug manufacturers to retail pharmacies in connection with such programs. Certain governmental entities have commenced investigations of PBM companies and other companies having dealings with the PBM industry and have identified issues concerning selection of drug formularies, therapeutic substitution programs and discounts or rebates from prescription drug manufacturers. Additionally, at least one state has filed a lawsuit concerning similar issues against a health plan. To date, the Company has not been the subject of any such investigation or suit and has not received subpoenas or been requested to produce documents for any such investigation or suit. However, there can be no assurance that the Company will not receive subpoenas or be requested to produce documents in pending investigations or litigation in the future. The Company believes that it is in compliance with the legal requirements imposed by the anti-remuneration laws and regulations, and the Company believes that there are material and substantial differences between drug switching programs that have been challenged under these laws and the therapeutic interchange practices and formulary management programs offered by the Company to its customers. However, there can be no assurance that the Company will not be subject to scrutiny or challenge under such laws or regulations, or that any such challenge would not have a material adverse effect upon the Company. THE STARK LAWS. The federal law known as "Stark II" became effective in 1995, and was a significant expansion of an earlier federal physician self-referral law commonly known as "Stark I". Stark II prohibits physicians from referring Medicare or Medicaid patients for "designated health services" to an entity with which the physician or an immediate family member of the physician has a financial relationship. Possible penalties for violation of the 10
Stark laws include denial of payment, refund of amounts collected in violation of the statute, civil monetary penalties and program exclusion. The Stark law standards contain certain exceptions for physician financial arrangements, and HCFA has released Stark II final regulations, which describe the parameters of these exceptions in more detail. The Stark II regulations are scheduled to become effective in January 2002, with the exception of one section relating to physician referrals to home health care agencies, which was scheduled to become effective in February 2001. STATE SELF-REFERRAL LAWS. The Company is subject to state statutes and regulations that prohibit payments for referral of patients and referrals by physicians to healthcare providers with whom the physicians have a financial relationship. Some state statutes and regulations apply to services reimbursed by governmental as well as private payors. Violation of these laws may result in prohibition of payment for services rendered, loss of pharmacy or health provider licenses, fines, and criminal penalties. The laws and exceptions or safe harbors may vary from the federal Stark laws and vary significantly from state to state. The laws are often vague, and, in many cases, have not been widely interpreted by courts or regulatory agencies; however, the Company believes it is in compliance with such laws. STATUTES PROHIBITING FALSE CLAIMS AND FRAUDULENT BILLING ACTIVITIES. A range of federal civil and criminal laws target false claims and fraudulent billing activities. One of the most significant is the Federal False Claims Act, which prohibits the submission of a false claim or the making of a false record or statement in order to secure a reimbursement from a government-sponsored program. In recent years, the federal government has launched several initiatives aimed at uncovering practices, which violate false claims or fraudulent billing laws. Claims under these laws may be brought either by the government or by private individuals on behalf of the government, through a "whistleblower" or "qui tam" action. REIMBURSEMENT. Approximately 47% of the Company's revenue is derived directly from Medicare or Medicaid or other government-sponsored healthcare programs subject to the federal anti-kickback laws and/or the Stark laws. Also, the Company indirectly provides benefits to managed care entities that provide services to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs. Should there be material changes to federal or state reimbursement methodologies, regulations or policies, the Company's reimbursements from government-sponsored healthcare programs could be adversely affected. In addition, certain state Medicaid programs only allow for reimbursement to pharmacies residing in the state or in a border state. While the Company believes that it can service its current Medicaid patients through existing pharmacies, there can be no assurance that additional states will not enact in-state dispensing requirements for their Medicaid programs. To the extent such requirements are enacted, certain therapeutic pharmaceutical reimbursements could be adversely affected. LEGISLATION AND OTHER MATTERS AFFECTING DRUG PRICES. Some states have adopted legislation providing that a pharmacy participating in the state Medicaid program must give the state the best price that the pharmacy makes available to any third party plan ("most favored nation" legislation). Such legislation may adversely affect the Company's ability to negotiate discounts in the future from network pharmacies. At least one state has enacted "unitary pricing" legislation, which mandates that all wholesale purchasers of drugs within the state be given access to the same discounts and incentives. Such legislation has not yet been enacted in the states where the Company's Mail Service pharmacies are located. Such legislation, if enacted in other states, could adversely affect the Company's ability to negotiate discounts on its purchase of prescription drugs to be dispensed by its Mail Service pharmacies. PRIVACY AND CONFIDENTIALITY LEGISLATION. Most of the Company's activities involve the receipt or use by the Company of confidential medical, pharmacy or other health-related information concerning individual Members, including the transfer of the confidential information to the Member's health benefit plan. In addition, the Company uses aggregated and blinded (anonymous) data for research and analysis purposes. In December 2000, HHS issued final regulations regarding the privacy of individually-identifiable health information pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). This final rule on privacy applies to a health care patient's medical information that could be used to identify the individual identity of the patient. We refer to this information as protected health information. The final rule mandates the protection of protected health information in any format, including both electronic and paper records, and imposes extensive requirements on the way in which health care providers such as us, as well as Plan Sponsors and their business associates, use and disclose protected health information. The final rule gives patients significant rights to understand and control how their protected health information is used and disclosed. Organizations subject to the rule will have 11
until April 14, 2003 comply with its provisions and implement appropriate policies and procedures to safeguard protected health information. HIPAA will likely increase our burden and costs of regulatory compliance with respect to our health improvement programs and other information-based products, alter our reporting to certain Plan Sponsors and may reduce the amount of information we may use if patients do not consent to such use. Sanctions for failing to comply with standards issued pursuant to HIPAA include possible jail time, criminal penalties of up to $250,000 and civil fines of up to $25,000. In addition, HHS has proposed, but not yet finalized, regulations pursuant to HIPAA that govern the security of individually-identifiable health information. In addition to the proposed federal health information privacy regulations described above, most states have enacted patient confidentiality laws, which prohibit the disclosure of confidential medical information. It is unclear which state laws may be preempted by the final HHS rule discussed above. CONSUMER PROTECTION LAWS. Most states have consumer protection laws that have been the basis for investigations and multi-state settlements relating to financial incentives provided by drug manufacturers to pharmacies in connection with drug switching programs. No assurance can be given that the Company will not be subject to scrutiny or challenge under one or more of these laws. DISEASE MANAGEMENT SERVICES REGULATION. All states regulate the practice of medicine. To the Company's knowledge, no PBM has been found to be engaging in the practice of medicine by reason of its disease management services. However, there can be no assurance that a federal or state regulatory authority will not assert that such services constitute the practice of medicine, thereby subjecting such services to federal and state laws and regulations applicable to the practice of medicine. COMPREHENSIVE PBM REGULATION. Although no state has passed legislation regulating PBM activities in a comprehensive manner, such legislation has been introduced in the past in several states. Such legislation, if enacted in a state in which the Company conducts a significant amount of business, could have a material adverse impact on the Company's operations. ANTITRUST LAWS. Numerous lawsuits have been filed throughout the United States by retail pharmacies against drug manufacturers challenging certain brand drug pricing practices under various state and Federal antitrust laws. A settlement in one such suit would require defendant drug manufacturers to provide the same types of discounts on pharmaceuticals to retail pharmacies and buying groups as are provided to managed care entities to the extent that their respective abilities to affect market share are comparable, a practice which, if generally followed in the industry, could increase competition from pharmacy chains and buying groups and reduce or eliminate the availability to the Company of certain discounts, rebates and fees currently received in connection with its drug purchasing and formulary administration programs. In addition, to the extent that the Company or an associated business appears to have actual or potential market power in a relevant market, business arrangements and practices may be subject to heightened scrutiny from an anti-competitive perspective and possible challenge by state or Federal regulators or private parties. For example, RxCare, which was investigated and found by the Federal Trade Commission to have potential market power in Tennessee, entered into a consent decree in June 1996 agreeing not to enforce a policy which had required participating network pharmacies to accept reimbursement rates from RxCare as low as rates accepted by them from other pharmacy benefits payors. To date, enforcement of antitrust laws have not had any material affect on the Company's business. While management believes that the Company is in substantial compliance with all existing laws and regulations stated above, such laws and regulations are subject to rapid change and often are uncertain in their application. As controversies continue to arise in the health care industry (for example, regarding the efforts of Plan Sponsors and pharmacy benefit managers to limit formularies, alter drug choice and establish limited networks of participating pharmacies), Federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which on the Company cannot be predicted. There can be no assurance that the Company will not be subject to scrutiny or challenge under one or more of these laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon the Company's business and results of operations. 12
EMPLOYEES At January 31, 2002, the Company employed a total of 360 people, including 36 licensed pharmacists. The Company's employees are not represented by any union and, in the opinion of management, the Company's relations with its employees are good. ITEM 2. PROPERTIES The Company's corporate headquarters are located in leased office space in Elmsford, New York. The Company also leases commercial office space for its above-described operations in South Kingstown, Rhode Island; Columbus, Ohio; Livingston, New Jersey; Roslyn Heights, New York; and Nashville, Tennessee. ITEM 3. LEGAL PROCEEDINGS Until settled on April 2, 2001, the Company had been engaged in commercial arbitration with Tennessee Health Partnership ("THP") over a number of commercial disputes surrounding the parties' relationship. See Note 9 of Notes to Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 13
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, par value $0.0001 per share ("Common Stock"), is traded on the National Market System of The Nasdaq Stock Market, Inc. under the symbol "MIMS". The following table represents the range of high and low sales prices for the Company's Common Stock for the last eight quarters. Such prices reflect interdealer prices, without retail markup, markdown or commissions and may not necessarily represent actual transactions. High Low --------------------- 2000: First Quarter........... $ 8.63 $ 2.44 Second Quarter.......... $ 4.38 $ 1.69 Third Quarter........... $ 2.75 $ 1.44 Fourth Quarter.......... $ 2.13 $ 0.63 2001: First Quarter........... $ 2.56 $ 0.81 Second Quarter.......... $ 6.65 $ 2.16 Third Quarter........... $ 12.58 $ 5.93 Fourth Quarter.......... $ 18.33 $ 9.46 As of March 15, 2002, there were 100 stockholders of record in addition to approximately 9,295 stockholders whose shares were held in nominee name. The Company has never paid cash dividends on its Common Stock and does not anticipate doing so in the foreseeable future. For purposes of calculating the aggregate market value of the shares of Common Stock held by non-affiliates, as shown on the cover page of this Annual Report on Form 10-K (the "Report"), it has been assumed that all outstanding shares of Common Stock were held by non-affiliates except for shares held by directors and executive officers of the Company and any persons disclosed as beneficial owners of greater than 10% of the Company's outstanding securities. However, this should not be deemed to constitute an admission that any or all such directors and executive officers of the Company are, in fact, affiliates of the Company, or that there are not other persons who may be deemed to be affiliates of the Company. During the three months ended December 31, 2001, the Company did not sell any securities without registration under the Securities Act of 1933, as amended (the "Securities Act"). 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below should be read in conjunction with, and is qualified in its entirety by reference to, Item 7 of this Report and with the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Report. <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------------------------------------------------------------------------- Statement of Operations Data 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenue (1) $ 456,646 $ 338,171 $ 350,693 $ 432,609 $ 217,432 Special charges and Tenncare reserve adjustment (2,476)(8) - 6,029(2) 3,700(3) - Net income (loss) (4,5,8) 14,202 (1,823) (3,785) 4,271 (13,497) Net income (loss) per basic share 0.67 (0.09) (0.20) 0.28 (1.07) Net income (loss) per diluted share (6) 0.64 (0.09) (0.20) 0.26 (1.07) Weighted average shares outstanding used in computing basic income (loss) per share 21,273 19,930 18,660 15,115 12,620 Weighted average shares outstanding used in computing diluted income (loss) per share 22,289 19,930 18,660 16,324 12,620 </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ------------------------------------------------------------------------------- BALANCE SHEET DATA 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Cash and cash equivalents $ 12,487 $ 1,290 $ 15,306 $ 4,495 $ 9,593 Investment securities - - 5,033 11,694 22,636 Working (deficit) capital 9,307 (11,184) 8,995 19,823 9,333 Total assets 139,819 120,401 115,683 110,106 62,727 Capital lease obligations, net of current portion 1,031 1,621 718 598 756 Long-term debt, net of current portion - - 2,279 6,185 (7) - Stockholders' equity 60,296 39,505 35,187 39,054 16,810 </TABLE> - -------------------------- (1) Beginning in 2001, as required by EITF Issue No. 00-22, the Company adopted a new method of recording rebates received from manufacturers as a reduction of cost of revenue and rebates shared with Plan Sponsors as a reduction of revenue. Prior to 2001 the Company recorded the difference between rebates billed and the rebates shared with customers as a reduction of cost of revenue. The years 1997, 1998, 1999 and 2000 have all been reclassified to give effect to this new methodology for comparative purposes. (2) In 1999, the Company recorded $6,029 of special charges for estimated losses on contract receivables relating to Tennessee Health Partnership, Preferred Health Plans and Xantus Health Plans of Tennessee ("Xantus"), as further described in Note 9 of Notes to Consolidated Financial Statements. (3) In 1998, the Company recorded two special charges, one for $1,500 and the other for $2,200, in connection with the negotiated termination of the RxCare relationship and amounts paid in settlement of the Federal and State of Tennessee investigation relating to the conduct of two former officers of the Company prior to the Company's initial public offering, respectively. (4) Net income (loss) includes legal expenses advanced for the defense of two former officers for the years 2000, 1999, 1998, and 1997 in the amounts of $3,100, $1,400, $ 1,300, and $800, respectively. (5) In the fourth quarter of 2000, the Company recorded a provision for loss of $2,300 on its investment in Wang Healthcare Information Systems. (6) The historical loss per common share for the years 2000, 1999 and 1997 excludes the effect of common stock equivalents, as their inclusion would be antidilutive. (7) This amount represents long-term debt assumed by the Company in connection with its acquisition of Continental. (8) In 2001, $2.5 million of adjustments were made to the Company's Tenncare(R) Reserve account. The first adjustment for $1 million occurred in the first quarter of 2001 relating to the Company's settlement on favorable terms of its commercial dispute with Tennessee Health Partnership. The second adjustment, of $1.5 million, occurred in the third quarter, related to the receipt of monies previously treated as uncollectible from Xantus. See Note 9 of Notes to Consolidated Financial Statements. 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjuction with the Company's Consolidated Financial Statements, including the Notes thereto, included elsewhere in this Report. This Report contains statements not purely historical and which may be considered forward looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including statements regarding the Company's expectations, hopes, beliefs, intentions or strategies regarding the future. Forward looking statements may include statements relating to the Company's business development activities, sales and marketing efforts, the status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements, future capital expenditures, the effects of regulation and competition on the Company's business, future operating performance of the Company and the results, benefits and risks associated with integration of acquired companies. Investors are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, that actual results may differ materially from those possible results discussed in the forward looking statements as a result of various factors. These factors include, among other things, risks associated with risk-based or "capitated" contracts, increased government regulation related to the health care and insurance industries in general and more specifically, pharmacy benefit management and specialty pharmaceutical distribution organizations, the existence of complex laws and regulations relating to the Company's business, increased competition from the Company's competitors, including competitors with greater financial, technical, marketing and other resources. This Report contains information regarding important factors that could cause such differences. The Company does not undertake any obligation to supplement these forward-looking statements to reflect any future events and circumstances. OVERVIEW The Company is a pharmaceutical healthcare organization delivering innovative pharmacy benefit, special pharmaceutical distribution and other pharmacy-related healthcare solutions. The Company combines its clinical expertise, sophisticated data management and therapeutic fulfillment capabilities to serve the particular needs of each of its customers and respective benefit recipients covered by the customers' pharmacy related health benefit. The Company provides a broad array of pharmacy benefit and pharmacy products and services to individuals ("Members") receiving health benefits principally through health insurers (including managed care organizations ("MCOs") and other insurance companies, and, to a lesser extent, third party administrators, labor unions, self-funded employer groups, government agencies, and other funded plan sponsors (collectively, "Plan Sponsors"). The Company's programs include the distribution of biotech and other prescription medications to the chronically ill and genetically impaired, the provision of pharmacy benefit management ("PBM") services to Members of Plan Sponsors, and the distribution of prescription maintenance medications to Plan Sponsors' Members by Mail Service. Depending on the goals and objectives of Plan Sponsors with which the Company does business, the Company provides some or all of the following clinical services as part of its PBM and specialty pharmacy programs: pharmacy case management, therapy assessment, compliance monitoring, health risk assessment, patient education and drug usage and interaction evaluation, pharmacy claims processing, Mail Service and related prescription distribution, benefit design consultation, drug utilization review, formulary management and consultation, drug data analysis, drug interaction management, patient compliance, program management and pharmaceutical rebate administration. BUSINESS In 2001, the Company primarily derived its revenues from agreements to provide PBM services, which includes prescription Mail Service to the Members of Plan Sponsors in the United States. The Company also provided specialty pharmacy services to chronically ill or genetically impaired patients that require injection and infusion therapies, as well as infusion therapies and home healthcare services to patients recently discharged from hospitals. The Company believes that its future growth is directly linked to the success of its specialty pharmacy growth strategy and believes that within 24 months, a majority of the Company's revenues will be derived from the provision of specialty pharmaceutical management and distribution operations. 16
RECENT DEVELOPMENT On March 14, 2002, the Justice Department charged our independent auditor, Arthur Andersen LLP, with a single felony count of obstruction of justice for destruction of documents related to its audit of Enron Corp. In response to this indictment, the Securities and Exchange Commission publicly announced that it has requested and received assurances from Andersen that it will continue to audit financial statements in accordance with generally accepted accounting standards and applicable professional and firm standards, including quality control standards. The Commission also stated that it has been advised by Andersen that if it becomes unable to provide these assurances, it would advise the Commission immediately. The Commission further stated that as long as Andersen continues to be in a position to provide these assurances, the Commission would continue to accept financial statements audited by Andersen in public filings. We obtained from Andersen certain representations concerning audit quality controls, including representations regarding the continuity of Andersen personnel working on our audit and the availability of national office consultation. Investors can call a hotline set up by the Commission, 1-800-SEC-0330, or e-mail the Commission at help@sec.gov, with any questions. SIGNIFICANT ACCOUNTING POLICIES We rely on the use of estimates and make assumptions that impact our financial condition and results. These estimates and assumptions are based on historical results and trends as well as our forecasts as to how these might change in the future. Our significant accounting policies that impact our results are included in Note 2 of the Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 For the year ended December 31, 2001, the Company recorded revenues of $456.6 million compared with 2000 revenues of $338.2 million, an increase of $118.4 million. The increase in revenues was the result of continued growth in all of the Company's businesses. Revenue from the Company's specialty pharmaceutical services approximated $41.5 million for 2001, compared to $17.9 million in 2000. The principal reasons for the increase are the development and growth of the Company's BioScrip injectable distribution services offerings and the inclusion of ADIMA's revenues for all of 2001. In 2000, ADIMA's results were included for five months (from August 4, 2000, the date of acquisition). For the year ended December 31, 2001, approximately 21.2% of the Company's revenue was generated from capitated contracts compared to approximately 28% in 2000. Based upon its present contractual arrangements, the Company anticipates that less than 7% of its revenues in 2002 will be derived from capitated contracts. Cost of revenue for 2001 increased to $403.2 million from $303.0 million for 2000, an increase of $100.2 million commensurate with the increases in revenue discussed above. Cost of revenue with respect to contracts with Plan Sponsors participating in the TennCare(R) program decreased $1.6 million from 2000 to 2001. Cost of revenue from commercial business increased $64.1 million, which includes an increase of $9.9 million from the inclusion of the full year of ADIMA's operating results. For the year ended December 31, 2001, gross profit increased $18.2 million to $53.4 million, from $35.2 million at December 31, 2000. Gross profit as a percentage of revenue increased to 11.7% in 2001 from 10.4% for the prior year. Gross margins were positively impacted in 2001 as a result of the increase in the Company's specialty pharmaceutical distribution services, which have higher associated gross profit margins than the Company's PBM and Mail Service businesses, as well as lower pharmaceutical utilization in the Company's capitated PBM contracts. Additionally, margins were positively impacted by a full year of ADIMA's operating results. In the first quarter of 2001, the Company adopted a new method of recording pharmaceutical manufacturers' rebates that are shared with the Company's PBM customers. As a result, the Company has recorded rebates shared with its customers as a reduction of revenue, and rebates billed to manufacturers as a reduction to cost of revenue. Prior to this, the Company recorded the net difference between rebates billed and rebates shared with customers as a reduction of cost of revenue. For comparative purposes, revenue and cost of revenue for the years ended December 31, 2000 and 1999 have been reclassified to reflect this change. 17
General and administrative expenses increased $4.6 million to $38.5 million in 2001 from $33.9 million in 2000, an increase of 13.6%. This increase was primarily the result of the inclusion of ADIMA's operating expenses for all of 2001 and increases related to the Company's general growth, including the hiring of additional key management in support of the Company's specialty pharmaceutical, PBM and Mail Service businesses net of legal expenditures incurred in 2000 arising out of the Company's obligation to advance legal fees to two former officers. As a percentage of revenue, general and administrative expenses decreased to 8.4% in 2001 from 9.1% in 2000. On May 4, 2000, the Company reached a negotiated settlement with Preferred Health Plans ("PHP"), pursuant to which, among other things, the Company retained rebates that would have otherwise been due and owing PHP. PHP paid the Company an additional $0.9 million and each party released the other from any and all liability with respect to past or future claims. This agreement did not have a material effect on the Company's results of operations or financial position. In 1999, the Company recorded special charges of $3.3 million for estimated future losses related to this dispute and another TennCare(R) provider. Early in 2001, the Company reached an agreement in principle with Tennessee Health Partnership ("THP") pursuant to which the Company paid THP $1.3 million in satisfaction of all claims between the parties. The terms of the settlement were favorable to the Company and $1 million of excess reserves no longer required were credited to income during the first quarter of 2001. In addition, approximately $1.5 million resulting from the collection of receivables from Xantus and the adjustment of related reserves provided for in prior years was credited to income in the third quarter of 2001. See Note 9 of Notes to Consolidated Financial Statements. For the year ended December 31, 2001, the Company recorded amortization of goodwill and other intangibles of $2.2 million compared to $1.5 million in 2000. This increase is due to inclusion of a full year of goodwill amortization for ADIMA. For the year ended December 31, 2001, the Company recorded net interest expense of $0.06 million compared to net interest income of $0.8 million for the year ended December 31, 2000, a net decrease of $0.86 million, primarily due to lower cash balances after the Company's then cash on hand in 2000 was used to purchase ADIMA. For the year ended December 31, 2001, the Company recorded a net profit of $14.2 million, or $0.64 per diluted share, which included one-time special gains totaling $2.5 million before taxes. This compares with a net loss of $1.8 million, or $0.09 per share, for the year ended December 31, 2000, which included special one-time charges of $5.4 million relating to the legal defense costs of two former officers and the write off of a non-operating investment. Earnings before interest, taxes, depreciation and amortization ("EBITDA") was $22.3 million for the year ended December 31, 2001, which include one time special gains of $2.5 million, compared to EBITDA of $4.8 million for the year ended December 31, 2000. EBITDA for the year ended December 31, 2000 was approximately $8.0 million, excluding the Company's legal defense costs of two former officers. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 For the year ended December 31, 2000, the Company recorded revenues of $338.2 million compared with 1999 revenues of $350.7 million, a decrease of $12.5 million. Contracts with Plan Sponsors participating in the TennCare(R) program accounted for decreased revenues of $43.3 million, principally as a result of the State of Tennessee assuming financial responsibility for the TennCare(R) dual eligible Members and the decrease in the number of TennCare(R) contracts managed by the Company, partially offset by an increase in revenue of $1.4 million related to a settlement of fees associated with 1998 services. Revenue increases as a result of the acquisition of ADIMA and an increase in commercial PBM and Mail Service revenues from both new and existing accounts increased revenue by $34.3 million. For the years ended December 31, 2000, approximately 28% of the Company's revenue was generated from capitated contracts compared to approximately 32% in 1999. Cost of revenue for 2000 decreased to $303.0 million from $320.4 million for 1999, a decrease of $17.4 million, commensurate with the decrease in revenue discussed above. Cost of revenue with respect to contracts with Plan Sponsors participating in the TennCare(R) program decreased $49.7 million from 1999 to 2000. Cost of revenue from commercial business increased $37.2 million, which includes an increase of $4.9 million from the purchase of ADIMA. For the year ended December 31, 2000, gross profit increased $4.9 million to $35.2 million, from $30.3 million at December 31, 1999. Gross profit increases of $6.4 million in TennCare(R) business resulted primarily from lower pharmaceutical utilization on TennCare(R) capitated agreements, as well as $1.4 million related to a settlement of fees associated with 1998 that was recorded in 2000. Gross profit increases in TennCare(R) business were offset by decreases in gross profit of $5.3 million in commercial and mail order business, and increases of $3.8 million contributed by the Company's acquisition of ADIMA. 18
General and administrative expenses increased $5.9 million to $33.9 million in 2000 from $28.0 million in 1999, an increase of 21%. $1.7 million of this increase is a result of increased legal expenditures primarily arising out of the Company's obligations to advance legal fees to former officers. In addition, the acquisition of ADIMA contributed $1.3 million of the increase and the remainder was attributable to severance obligations to two executives, higher levels of depreciation due to capital improvements in our fulfillment facility, and increased costs associated with a larger sales force in 2000. As a percentage of revenue, general and administrative expenses increased to 10.0% in 2000 from 8.0% in 1999. In 1999, the Company incurred one-time special charges of $6.0 million for Xantus PHP and THP, as discussed below. See Note 9 of Notes to Consolidated Financial Statements. 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 $0.9 million and the respective parties released each other from any and all liability with respect to past or future claims. This agreement did not have a material effect on the Company's results of operations or financial positions. For the year ended December 31, 2000, the Company recorded amortization of goodwill and other intangibles of $1.5 million compared to $1.1 million in 1999. This increase is primarily due to the goodwill amortization for ADIMA. For the year ended December 31, 2000, the Company recorded interest income of $0.8 million compared to $1.0 million for the year ended December 31, 1999, a decrease of $0.2 million, primarily due to lower cash balances after the purchase of ADIMA. Earnings before interest, taxes, depreciation and amortization ("EBITDA") was $4.8 million for the year ended December 31, 2000, compared to negative $1.4 million EBITDA for the year ended December 31, 1999. EBITDA for the year ended December 31, 2000 was approximately $8.0 million, excluding the Company's advances of legal defense costs of two former officers. For the year ended December 31, 2000, the Company recorded a net loss of $1.8 million or $0.09 per share. This includes a one time, non-operating provision for $2.3 million relating to the Company's loss on its investment in Wang Healthcare Information Systems ("WHIS"). This compares with a net loss of $3.8 million, or $0.20 per share, for the year ended December 31, 1999. In 1997, the Company purchased 1,150,000 shares of the Series B Convertible Preferred Stock of WHIS, par value $0.01 per share, for an aggregate purchase price equal to $2.3 million. Due to changes in the financial situation at WHIS and its ability to access capital, the Company recorded a provision for loss on this investment in December 2000. LIQUIDITY AND CAPITAL RESOURCES The Company utilizes both funds generated from operations and available credit under its credit facility for acquisitions, capital expenditures and its general working capital needs. For the year ended December 31, 2001, net cash provided to the Company from operating activities totaled $11.0 million primarily due to increased business. Cash used in investing activities was $3.7 million primarily due to the acquisition costs of $1.5 million for Community Prescription Service, Inc. ("CPS") in May 2001, and the earnouts for other acquisitions which together used cash of $2.2 million. The Company also purchased $2.6 million of equipment in support of the Company's Mail Service and fulfillment facility located in Columbus, Ohio. Net cash provided by financing activities in the year ended December 31, 2001 was $3.9 million. Stock options exercised for $7.3 million were partially offset by the Company's purchase of treasury stock of $2.6 million. 19
At December 31, 2001, the Company had working capital of $9.3 million compared to a working capital deficit of $11.2 million at December 31, 2000. This is primarily due to increased cash on hand of $11.2 million, and an increase of $9.7 million in receivables due to increased business. Increased cash on hand was partially offset by an increase in claims payable of $8.7 million. Working capital was also impacted by a decrease in payables to Plan Sponsors as a result of payment acceleration. On November 1, 2000 the Company entered into a $45 million secured revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate of Healthcare Finance Group, Inc. ("HFG"). The Facility is, and will continue to be, used for working capital purposes and future acquisitions in support of the Company's business plan. The Facility has a three-year term, provides for borrowing of up to $45 million at the London InterBank Offered Rate (LIBOR) plus 2.1% and is secured by receivables of the Company's principal operating subsidiaries. The facility contains various covenants that, among other things, require the Company to maintain certain financial ratios as defined in the agreement governing the Facility. As of March 15, 2002, there was outstanding $9.2 million under the Facility as a result of the Company's acquisition of Vitality in January 2002. 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 and available credit to fund the Company's anticipated working capital and other operational cash needs for at least the next 12 months. The Company also may pursue joint venture arrangements, business acquisitions and other transactions designed to expand its specialty pharmacy, Mail Service and PBM businesses, which the Company would expect to fund from cash on hand, the Facility, other future indebtedness or, if appropriate, the private and/or public sale or exchange of equity securities of the Company. 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, 2001, the Company had unused Federal net operating loss carryforwards of $40.3 million, which will begin expiring in 2009. In the opinion of management, as the Company has not had a history of consistent profitability, it is uncertain whether the Company will realize the benefit from its deferred tax assets and has provided a valuation allowance. As of December 31, 2001, certain of the company's Federal net operating loss carryforwards are subject to limitation and may be utilized in a future year upon release of the limitation. If Federal net operating loss carryforwards are not utilized in the year they are available they may be utilized in a future year to the extent they have not expired. OTHER MATTERS In 1998, the Company recorded a $2.2 million special charge against earnings in as a result of an agreement in principle with respect to a civil settlement of a Federal and State of Tennessee investigation in connection with conduct involving, among others, two former officers of the Company occurring prior to the Company's August 1996 initial public offering. The definitive agreement covering that settlement was executed on June 15, 2000, and required payment of $775,000 in 2000, payment of $900,000 in 2001, and payment of $525,000 in 2002. At December 31, 2001, $525,000 is outstanding and included in accrued expenses. The TennCare(R) program operates under a demonstration waiver from The United States Center for Medicare and Medicaid Services ("CMS"). That waiver is the basis of the Company's ongoing service to those MCOs in the TennCare(R) program. The waiver expired on December 31, 2001 and was renewed without material modification through December 31, 2002. In addition, the State of Tennessee and the Federal governments have agreed to negotiate towards an additional two-year extension of the waiver through December 31, 2004. While the Company believes that pharmacy benefits will continue to be provided to Medicaid and other eligible TennCare(R) enrollees through MCOs in one form or another through at least December 31, 2004, there can be no assurances that such waiver will be renewed 20
after December 31, 2002, that pharmacy benefits will continue under the TennCare(R) Program or that the MCO's currently being serviced by the Company will continue their respective relationships with it under the existing or a successor program or on the same or similar terms and conditions. If the waiver is not renewed and the Company is not providing PBM and/or distributing specialty products to those lives under a successor program or arrangement, then the failure to provide such services could have a material and adverse affect on the financial position and results of operations of the Company. Moreover, should the funding sources and/or conditions for the TennCare(R) program change significantly, the TennCare(R) program's ability to pay the MCOs, and in turn the MCOs ability to pay the Company, could materially and adversely affect the Company's financial position and results of operations. Historically, as a result of providing capitated PBM services to certain TennCare(R) MCOs, the Company's pharmaceutical claims costs had been subject to significant increases from October through February, which the Company believes is due to the need for increased medical attention to, and intervention with, MCOs' Members during the colder months. The resulting increase in pharmaceutical costs impacted the profitability of capitated contracts. Currently, the Company has no capitated PBM arrangements with MCOs participating in the TennCare(R) program. Fee for service arrangements mitigate the adverse effect on profitability of higher pharmaceutical costs incurred under capitated contracts, as higher utilization positively impacts profitability. The Company presently anticipates that less than 7% of its revenues for 2002 will be derived from capitated arrangements. Generally, loss contracts arise only on capitated or other risk-based contracts and primarily result from higher than expected pharmacy utilization rates, higher than expected inflation in drug costs and the inability of the 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. In the first quarter of 2001, the Company commenced a stock repurchase program under which it was authorized to repurchase up to $5 million of the Company's Common Stock from time to time on the open market or in private transactions. In February 2001, the Company repurchased 1,298,183 shares of Common Stock at a price of $2.00 per share in private transactions. See "Certain Relationships and Related Transactions" below. Since that date, the Company has not repurchased any additional shares of its Common Stock. On March 23, 2002, Mr. Richard Friedman, the Company's Chairman and Chief Executive Officer, repaid in full a $1.7 million loan from the Company, together with all accrued and unpaid interest thereon. This loan, together with accrued and upaid interest, totaled approximately $2.1 million. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's debt. At December 31, 2001 the Company did not have any long term debt. The Company does not invest in or otherwise use derivative financial instruments. At December 31, 2001, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, claims payable, payables to Plan Sponsors and others, and debt approximate fair value due to their short-term nature. Because management does not believe that its exposure to interest rate market risk is material at this time, the Company has not developed or implemented a strategy to manage this market risk through the use of derivative financial instruments or otherwise. The Company will assess the significance of interest rate market risk from time to time and will develop and implement strategies to manage that risk as appropriate. 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of MIM Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheets of MIM Corporation (a Delaware corporation) and Subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MIM Corporation and Subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements, and in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Roseland, New Jersey February 16, 2002 22
<TABLE> <CAPTION> MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, (In thousands, except for share amounts) 2001 2000 -------------------- --------------------- ASSETS CURRENT ASSETS <S> <C> <C> Cash and cash equivalents $ 12,487 $ 1,290 Receivables, less allowance for doubtful accounts of $5,543 and $8,333 at December 31, 2001 and 2000, respectively 70,089 60,808 Inventory 3,726 2,612 Prepaid expenses and other current assets 1,439 1,680 -------------------- --------------------- Total current assets 87,741 66,390 Property and equipment, net 9,287 10,813 Due from officer 2,132 2,012 Other assets, net 1,650 2,163 Intangible assets, net 39,009 39,023 -------------------- --------------------- TOTAL ASSETS $ 139,819 $ 120,401 ==================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of capital lease obligations $ 594 $ 592 Current portion of long-term debt - 165 Accounts payable 4,468 2,964 Claims payable 46,564 39,337 Payables to Plan Sponsors 21,063 29,040 Accrued expenses and other current liabilities 5,745 5,476 -------------------- --------------------- Total current liabilities 78,434 77,574 Capital lease obligations, net of current portion 1,031 1,621 Other non-current liabilities 58 589 Minority interest - 1,112 -------------------- --------------------- TOTAL LIABILITIES 79,523 80,896 -------------------- --------------------- Commitments and contingencies 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, 22,004,101 and 21,547,312 shares issued and outstanding at December 31, 2001 and 2000, respectively 2 2 Additional paid-in capital 105,424 97,010 Accumulated deficit (42,196) (56,398) Treasury stock, 1,398,183 and 100,000 shares at cost at December 31, 2001 and 2000, respectively (2,934) (338) Stockholder notes receivable - (771) -------------------- --------------------- Total stockholders' equity 60,296 39,505 -------------------- --------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 139,819 $ 120,401 ==================== ===================== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 23
MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) <TABLE> <CAPTION> 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> Revenue $ 456,646 $ 338,171 $ 350,693 Cost of revenue 403,243 302,991 320,388 --------- --------- --------- Gross profit 53,403 35,180 30,305 General and administrative expenses 38,489 30,811 26,656 Legal fees due to indemnification responsibility - 3,098 1,353 Amortization of goodwill and other intangibles 2,200 1,450 1,064 TennCare reserve adjustment (2,476) - 6,029 --------- --------- --------- Income (loss) from operations 15,190 (179) (4,797) Interest (expense) income, net (56) 766 1,012 Provision for loss on investment - 2,300 - --------- --------- --------- Income (loss) before provision for income taxes 15,134 (1,713) (3,785) Provision for income taxes 932 110 - --------- --------- --------- Net income (loss) $ 14,202 $ (1,823) $ (3,785) ========= ========= ========= Basic income (loss) per common share $ 0.67 $ (0.09) $ (0.20) ========= ========= ========= Diluted income (loss) per common share $ 0.64 $ (0.09) $ (0.20) ========= ========= ========= Weighted average common shares used in computing basic income (loss) per common share 21,273 19,930 18,660 ========= ========= ========= Weighted average common shares used in computing diluted income (loss) per common share 22,289 19,930 18,660 ========= ========= ========= </TABLE> 24 The accompanying notes are an integral part of these consolidated financial statements.
<TABLE> <CAPTION> MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) ADDITIONAL STOCKHOLDER TOTAL COMMON TREASURY PAID-IN ACCUMULATED NOTES STOCKHOLDERS STOCK STOCK CAPITAL DEFICIT RECEIVABLE EQUITY <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance December 31, 1998 $ 2 $ - $ 91,603 $(50,790) $ (1,761) $ 39,054 ======== ======== ======== ======== ======== ======== Payments of stockholder loans - - - - 245 245 Exercise of stock options - - 5 - - 5 Non-employee stock option compensation expense - - 6 - - 6 Purchase of treasury stock - (338) - - - (338) Net loss - - - (3,785) - (3,785) -------- -------- -------- -------- -------- -------- Balance December 31, 1999 $ 2 $ (338) $ 91,614 $(54,575) $ (1,516) $ 35,187 ======== ======== ======== ======== ======== ======== Payments of stockholder loans - - - - 745 745 Exercise of stock options - - 333 - - 333 Shares issued in connection with ADIMA acquisition - - 5,034 - - 5,034 Non-employee stock option compensation expense - - 29 - - 29 Net loss - - - (1,823) - (1,823) -------- -------- -------- -------- -------- -------- Balance December 31, 2000 $ 2 $ (338) $ 97,010 $(56,398) $ (771) $ 39,505 ======== ======== ======== ======== ======== ======== Reclassification of stockholders loans to other assets - - - - 771 771 Exercise of stock options - - 7,274 - - 7,274 Issuance of common stock to employees - - 28 - - 28 Dissolution of MIM Strategic - - 1,112 - - 1,112 Purchase of treasury stock - (2,596) - - - (2,596) Net income - - - 14,202 - 14,202 -------- -------- -------- -------- -------- -------- Balance December 31, 2001 $ 2 $ (2,934) $105,424 $(42,196) - $ 60,296 ======== ======== ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 25
<TABLE> <CAPTION> MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SOURCE (USE) OF CASH YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: <S> <C> <C> <C> Net income (loss) $ 14,202 $ (1,823) $ (3,785) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities net of acquisitions: Depreciation and amortization 6,358 4,876 3,220 Loss on investment - 2,300 - TennCare reserve adjustment (2,476) - - Issuance of stock to non-employees - 29 6 Issuance of stock to employees 28 - - Provision for losses on receivables and due from affiliates 1,383 571 6,537 Changes in assets and liabilities, net of acquisitions Receivables, net (9,684) 8,989 (4,709) Inventory (1,114) (1,013) 410 Prepaid expenses and other current assets 241 (297) (490) Accounts payable 1,504 (2,236) (1,887) Claims payable 8,723 (4,364) 6,847 Payables to Plan Sponsors and others (7,977) 4,869 7,681 Accrued expenses 269 (1,067) (934) Non-current liabilities (531) 500 - -------- -------- -------- Net cash provided by operating activities 10,926 11,334 12,896 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,632) (6,634) (2,180) Purchases of investment securities - (4,000) (7,070) Maturities of investment securities - 9,033 13,731 Costs of acquisitions, net of cash acquired (2,186) (19,638) (669) Purchases of other investments - - (36) Repayments of stockholder notes 504 745 245 Due from affiliates, net (120) (163) (1,815) Decrease (increase) in other assets 780 (1,905) 361 -------- -------- -------- Net cash (used in) provided by investing activities (3,654) (22,562) 2,567 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations (588) (514) (699) Decrease in debt (165) (2,607) (3,620) Proceeds from exercise of stock options 7,274 333 5 Purchase of treasury stock (2,596) - (338) -------- -------- -------- Net cash provided by (used in) financing activities 3,925 (2,788) (4,652) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 11,197 (14,016) 10,811 CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD 1,290 15,306 4,495 -------- -------- -------- CASH AND CASH EQUIVALENTS--END OF PERIOD $ 12,487 $ 1,290 $ 15,306 ======== ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 26
MIM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, (IN THOUSANDS) SUPPLEMENTAL DISCLOSURES: The Company paid $465, $657 and $277 of interest for each of the years ended December 31, 2001, 2000, and 1999, respectively. Capital lease obligations of $0, $1,495 and $807 were incurred to acquire equipment for each of the years ended December 31, 2001, 2000, and 1999, respectively. In connection with the acquisition of American Disease Management Associates L.L.C. ("ADIMA"), the Company issued 2,700 shares of its common stock, par value $0.0001 per share, valued at $5,034 during the year ended December 31, 2000. In 2001, there was a contribution of a minority interest to additional paid-in capital upon dissolution of a subsidiary of $1,112. In 2001, the Company reclassified stockholder notes receivable of $771 to other assets. During 2001, the stockholder repaid $504 of the notes outstanding. As of December 31, 2001, $267 of the stockholder notes are outstanding and included in other assets. The accompanying notes are an integral part of these consolidated financial statements. 27
MIM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS) NOTE 1--NATURE OF BUSINESS CORPORATE ORGANIZATION MIM Corporation (the "Company" or "MIM") is a pharmaceutical healthcare organization delivering innovative pharmacy benefit, special pharmaceutical distribution and other pharmacy-related healthcare solutions to Plan Sponsors, principally managed care organizations and third party administrators. The Company combines its clinical expertise, sophisticated data management and therapeutic fulfillment capabilities to serve the particular needs of each of its customers and respective benefit recipients covered by the customers' pharmacy related health benefit. The Company provides a broad array of pharmacy benefit and pharmacy products and services to individuals ("Members") receiving health benefits principally through health insurers (including managed care organizations ("MCOs") and other insurance companies, and, to a lesser extent, third party administrators, labor unions, self-funded employer groups, government agencies, and other funded Plan Sponsors ("Plan Sponsors"). The Company's programs include the distribution of biotech and other high-cost prescription medications to the chronically ill and genetically impaired, the provision of pharmacy benefit management ("PBM") services to members of Plan Sponsors, and the distribution of prescription maintenance medications to Plan Sponsors' Members through mail service ("Mail Service"). All of the Company's programs include the provision of clinical pharmacy services, designed to provide patients with high quality care while controlling pharmacy and overall health care costs. Depending on the goals and objectives of the Plan Sponsors with which the Company does business, the Company provides some or all of the following clinical services as part of its PBM and/or Specialty Pharmacy Programs, all of which will be described below in greater detail: pharmacy case management, therapy assessment, compliance monitoring, health risk assessment, patient education, drug usage and interaction evaluation, pharmacy claims processing, Mail Service and related prescription distribution, benefit design consultation, drug utilization review, formulary management and consultation, drug data analysis, drug interaction management, patient compliance, program management and pharmaceutical rebate administration. BUSINESS In 2001, the Company primarily derived its revenues from agreements to provide PBM services, which includes prescription Mail Service to the Members of Plan Sponsors in the United States. The Company also provided specialty pharmacy services to chronically ill or genetically impaired patients that require injection and infusion therapies, as well as infusion therapies and home healthcare services to patients recently discharged from hospitals. A portion of the Company's revenues have been derived from providing PBM services in the State of Tennessee to managed care organizations ("MCOs") participating in the State of Tennessee's TennCare(R) program. Through its BioScrip(TM) specialty injectable therapy programs, the Company distributes high-cost pharmaceuticals and provides clinically focused case and disease management programs to Plan Sponsors' members afflicted with chronic illnesses or genetic impairments. The disease states or conditions for which the Company has injectable specialty programs include HIV/AIDS, oncology, hemophilia, multiple sclerosis, growth hormone deficiency, Gaucher's disease, rheumatoid arthritis, infertility, respiratory syncytial virus (RSV), hepatitis C, Crohn's disease and transplant. The Company also distributes prescription medications and provides clinical management services to patients through its Vitality Pharmaceutical Services ("Vitality") subsidiary located in Roslyn Heights, New York, acquired in January 2002. While BioScrip is marketed exclusively to Plan Sponsors, Vitality also markets its products and services to physician practice groups, hospitals, and, in some cases, directly to patients. On August 4, 2000, the Company acquired all of the issued and outstanding membership interest of ADIMA. The aggregate purchase price approximated $24,000, and included $19,000 in cash and 2.7 million shares of MIM common stock valued at that time at $5,000. ADIMA, located in Livingston, New Jersey, distributes and administers high cost specialty infusion therapy to patients requiring principally immunosuppression blood products, such as IGG, parenteral nutrition products, such as TPN, and antibiotic therapies such as rocephin or vancomycin. Unlike the Company's other specialty programs, patients being serviced through ADIMA have their therapies administered by IV certified nurses. The consolidated financial statements include the results of ADIMA from the date of acquisition. On May 1, 2001, the Company acquired Community Prescription Service, Inc. ("CPS") for $1,500, plus acquisition costs. The acquisition was treated as a purchase for financial reporting purposes. Based on a final appraisal, the Company has recorded intangible assets in connection with that acquisition which will be amortized over three to seven years. Operating results of CPS, which are included in the accompanying statements of operations from the date of acquisition, were not material to the results of operations for the twelve months ended December 31, 2001. 28
The following unaudited consolidated pro forma financial information has been prepared assuming ADIMA was acquired as of January 1, 1999, with pro forma adjustments for amortization of goodwill and interest income. The pro forma financial information is presented for informational purposes only and is not indicative of the results that would have been realized had the acquisition been made on January 1, 1999. The Company's statement of operations for the year ended December 31, 2001 include ADIMA's results of operations for the entire period. In addition, this pro forma financial information for the year ended December 31, 1999 and 2000 is not intended to be a projection of future operating results. YEAR ENDED DECEMBER 31 ---------------------- 2000 1999 ---- ---- Revenues ............................. $ 380,032 $388,611 Net loss ............................. $ (85) $ (1,933) Basic loss per share ................. (0.00) (.09) Diluted loss per share ............... (0.00) (.09) The pro forma amounts above include $10,328 and $11,191 of revenues from the operations of ADIMA for the period from January 1, 2000 and 1999 respectively through the acquisition date. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of MIM Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include demand deposits, overnight investments and money market accounts. RECEIVABLES Receivables include amounts due from Plan Sponsors under the Company's PBM contracts, amounts due from pharmaceutical manufacturers for rebates and service fees resulting from the distribution of certain drugs through retail pharmacies and amounts due from certain third party payors. INVENTORY Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of assets. The estimated useful lives of the Company's assets are as follows: ASSET USEFUL LIFE - ----- ----------- Computer and office equipment................. 3-5 years Furniture and fixtures........................ 5-7 years Leasehold improvements and leased assets are amortized using a straight-line basis over the related lease term or estimated useful life of the assets, whichever is less. The cost and related accumulated depreciation of assets sold or retired are removed from the accounts with the gain or loss, if applicable, recorded in the statement of operations. Maintenance and repairs are expensed as incurred. DEFERRED FINANCING COSTS Deferred financing costs, which are included in other assets, represent fees incurred in connection with obtaining debt financing and are amortized over the life of the related debt. 29
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets represent the cost in excess of the fair market value of the tangible net assets acquired in connection with acquisitions. Amortization expense for the years ended December 31, 2001, 2000 and 1999, was $2,200, $1,450 and $1,064, respectively. Goodwill is amortized over periods ranging from twenty to twenty-five years and other intangible assets are amortized over four to six years. Intangible assets comprised the following as of December 31: <TABLE> <CAPTION> 2001 2000 ---- ---- <S> <C> <C> Goodwill $41,415 $40,607 Other intangibles 2,636 1,258 ------- ------- Total 44,051 41,865 Less: Amortization of goodwill and other intangibles 5,042 2,842 ------- ------- Net intangible assets $39,009 $39,023 ======= ======= </TABLE> LONG-LIVED ASSETS The Company periodically reviews its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company does not believe such events or changes in circumstances have occurred. CLAIMS PAYABLE The Company is responsible for all covered prescriptions provided to plan members during the contract period. At December 31, 2001 and 2000, certain prescriptions were dispensed to members for whom the related claims had not yet been presented to the Company for payment. Estimates of $124 and $693 at December 31, 2001 and 2000, respectively, for these claims are included in claims payable. PAYABLES TO PLAN SPONSORS Payables to Plan Sponsors represent the sharing of pharmaceutical manufacturers' rebates with the Plan Sponsors, as well as profit sharing plans with certain capitated contracts. REVENUE RECOGNITION CAPITATED AGREEMENTS. The Company's capitated contracts with Plan Sponsors require the Company to provide covered pharmacy services to Plan Sponsor members in return for a fixed fee per member per month paid by the Plan Sponsor. Capitated contracts generally have a one-year term or, if longer, provide for adjustment of the capitated rate each year. These contracts are subject to rate adjustment or termination upon the occurrence of certain events. Payments under capitated contracts are based upon the latest eligible member data provided to the Company by the Plan Sponsor. On a monthly basis, the Company recognizes revenue for those members eligible for the current month, plus or minus capitation amounts for those members determined to be retroactively eligible or ineligible for prior months under the contract. The amount accrued for net retroactive eligibility capitation payments are based upon management's estimates. Generally, loss contracts arise only on capitated contracts and primarily result from higher than expected pharmacy utilization rates, higher than expected inflation in drug costs and the inability to restrict formularies, 30
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 expected loss contracts and management does not believe that there is an overall trend towards losses on its existing capitated contracts. All revenue is recorded net of the rebate share payable to Plan Sponsors. FEE-FOR-SERVICE AGREEMENTS. Under fee-for-service PBM contracts, revenues from orders dispensed by the Company's pharmacy networks are recognized when the pharmacy services are reported to the Company by the dispensing pharmacist, through the on line claims processing systems. The Company assumes financial risk through having independent contractual arrangements with its Plan Sponsors and retail network pharmacy providers. PRESCRIPTION SERVICES. The Company's integrated pharmacy benefit services include the delivery of pharmaceutical services and products. Such services and products may be provided by the Company's pharmacy dispensing facility, by ADIMA, or by one of its network pharmacies. Such products must be provided and dispensed before the total pharmacy benefit service is billed under the fee for services agreements described above. COST OF REVENUE Cost of revenue includes pharmacy claims, fees paid to pharmacists and other direct costs associated with pharmacy management, claims processing operations and mail order services, offset by volume rebates received from pharmaceutical manufacturers. For the years ended December 31, 2001, 2000 and 1999, gross rebates earned on rebate sharing arrangements on pharmacy benefit management contracts were $38,572, $45,230 and $43,611, respectively. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 utilizes the liability method, and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities at currently enacted tax laws and rates. 31
EARNINGS PER SHARE Basic earnings (loss) per common share are based on the weighted average number of shares outstanding and diluted earnings per share are based on the weighted average number of shares outstanding, including common stock equivalents. For the years ended December 31, 2000 and 1999, diluted loss per share is the same as basic loss per share because the inclusion of common stock equivalents would be anti-dilutive. <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------ 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> Numerator: Net Income (loss) $ 14,202 $ (1,823) $ (3,785) ======== ======== ======== Denominator - Basic: Weighted average number of common shares outstanding 21,273,000 19,930,000 18,660,000 ============ ============ ============ Basic income (loss) per common share $ 0.67 $ (0.09) $ (0.20) ============ ============ ============ Denominator - Diluted: Weighted average number of common shares outstanding 21,273,000 19,930,000 18,660,000 Common share equivalents of outstanding stock options 1,016 0 0 ------------ ------------- ------------- Total shares outstanding 22,289,000 19,930,000 18,660,000 ============ ============ ============ Diluted income (loss) per common share $ 0.64 $ (0.09) $ (0.20) ============ ============ ============ </TABLE> INDUSTRY SEGMENTS The Company operates in one industry segment. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and short-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximate fair value due to their short-term nature. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for employee stock based compensation plans and non-employee director stock incentive plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Stock options granted to non-employees are accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (See Note 11). RECENT ACCOUNTING PRONOUNCEMENTS In January 2001, the Company adopted Emerging Issues Task Force Issue No. 00-22 ("EITF 00-22"), "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future". EITF 00-22, states, among other things, that rebates received from pharmaceutical manufacturers should be recognized as a reduction of cost of revenue and rebates shared with Plan Sponsors as a reduction of revenue. Prior to adoption of EITF 00-22, the Company recorded the difference between the rebates received and the rebates shared with customers as a reduction of cost of revenue. The adoption of EITF 00-22 required the Company to classify $27,401 and reclassify $31,623 and $26,727 of rebates shared as reductions of revenue for years ended December 31, 2001, 2000, and 1999, respectively. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," which establishes accounting and reporting standards governing business combinations, goodwill and intangible assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. SFAS No. 142 states that goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value based test. Under the new rules, an acquired intangible asset should be separately recognized and amortized over its useful life unless an indefinite life) if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged regardless of the acquirer's intent to do so. The Company is required to adopt these standards on January 1, 2002. During the year ended December 31, 2001 the Company continued to amortize its existing goodwill and intangible assets. The Company expects that a substantial amount of its goodwill will no longer be amortized upon adoption. 32
In August 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 14, 2002. The Company does not expect that the adoption of SFAS No. 143, which is effective for the Company as of January 1, 2003, will have any effect on its results of operations, financial position or cash flows. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment of Disposal of Ling-Lived Assets", which is effective for fiscal years beginning after December 15, 2001, and addresses financial accounting and reporting for the impairment of disposal of ling-lived assets. This statement supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of segment of a business. The company plans to adopt the standard at the beginning of 2002, and does not expect that the adoption of SFAS No. 144 will have any effect on its results of operations, financial position or cash flows. RECLASSIFICATIONS Certain amounts in the 2000 and 1999 financial statements have been reclassified to conform to current year presentation. NOTE 3--INVESTMENT On June 23, 1997, the Company acquired an 8% interest in Wang Healthcare Information Systems, Inc. ("WHIS"), which markets PC-based clinical information systems to physicians utilizing patented image-based technology. The Company purchased 1,150,000 shares of the Series B Convertible Preferred Stock of WHIS, for an aggregate purchase price equal to $2,300. Due to changes in the financial situation at WHIS and its ability to access capital, the Company recorded a provision for loss in the amount of $2,300 on this investment in 2000. NOTE 4--RELATED PARTY TRANSACTIONS The Company leases one of its facilities from Alchemie Properties, LLC ("Alchemie") pursuant to a ten-year agreement. Alchemie is controlled by Mr. E. David Corvese, a stockholder and a former officer and director of the Company (the "Founder"). Rent expense was approximately $56, $51 and $56 for the years ended December 31, 2001, 2000, and 1999. STOCKHOLDER NOTES RECEIVABLE On March 23, 2002, Mr. Richard Friedman, the Company's Chairman and Chief Executive Officer, repaid in full a $1,700 loan, together with all accrued and unpaid interest thereon, totalling approximately $2,100. Interest income on the note was $121, $161 and $101 for the years ended December 31, 2001, 2000 and 1999, respectively. The Company had a $502 note receivable outstanding with the Founder as of December 31, 2000. The note was repaid in 2001. Interest income on the note was $41 for the year ended December 31, 2001, and $46 for the years ended December 31, 2000 and 1999, respectively. The Company has a $267 and $269 note receivable from Alchemie outstanding as of December 31, 2001 and 2000, respectively. The note bears interest at a rate of 10% per annum with principal due and payable on December 1, 2004. Interest income was $29, $27 and $29 for the years ended December 31, 2001, 2000 and 1999. This note was paid in full on January 31, 2002. 33
The Company had a $780 note receivable from the Founder outstanding as of December 31, 1999. The note was fully repaid in 2000. Interest income on the notes was $27 and $56 for the years ended December 31, 2000 and 1999, respectively. In 2001, the Company reclassified the then outstanding stockholder notes receivable from the Founder of approximately $771 from a reduction of stockholders' equity to other assets. Although the loans did not originate from the issuance of, or were otherwise collateralized by, the Company's equity securities, the Company initially classified the promissory notes in equity due to the nature of the borrowers' relationship to the Company at the time of the notes' origination. At that time, the Founder was the President and majority stockholder of the Company. As such, the borrowers and the Company were entities under common control at that time and the promissory notes were therefore treated as equity. The Founder is no longer an officer, director or majority stockholder of the Company and accordingly, the borrowers and the Company are no longer considered to be entities under common control. As of December 31, 2001, only the remaining note receivable from Alchemie is outstanding and included in other assets. INDEMNIFICATION Under certain circumstances, the Company was obligated to indemnify and advance defense costs to two former officers (one of which is a former director and still principal stockholder of the Company) of a subsidiary of the Company in connection with their involvement in the Federal and State of Tennessee investigation of which they are the subject. During 2001, 2000 and 1999, the Company advanced and expensed $0, $3,098 and $1,353, respectively, for the former officers' legal costs in this matter. NOTE 5--PROPERTY AND EQUIPMENT Property and equipment, at cost, consists of the following at December 31: <TABLE> <CAPTION> 2001 2000 ---- ---- <S> <C> <C> Computer and office equipment, including equipment acquired under capital leases $ 18,000 $ 15,483 Furniture and fixtures 1,149 1,095 Leasehold improvements 1,117 1,056 -------- -------- 20,266 17,634 Less: Accumulated depreciation (10,979) (6,821) -------- -------- Property and equipment, net $ 9,287 $ 10,813 ======== ======== </TABLE> NOTE 6--LONG TERM DEBT On November 1, 2000 the Company entered into a $45,000 revolving credit facility (the "Facility") with HFG Healthco-4 LLC, an affiliate of Healthcare Finance Group, Inc. ("HFG"), to be used for working capital purposes and future acquisitions. The Facility has a three-year term and is secured by the Company's receivables. Interest is payable monthly and provides for borrowing up to $45,000 at the London Inter-Bank Offered Rate (LIBOR) plus 2.1% (4.25% as of December 2001). A 0.5% fee is incurred monthly when the line is not utilized. In connection with the issuance of the Facility, the Company incurred financing costs of $1,642, which are included in other assets and are being amortized over the term of the agreement. The facility contains various covenants that, among other things, require the Company to maintain certain financial ratios, as defined in the agreement governing the Facility. As of December 31, 2001 and 2000, the Company had no amounts outstanding under the revolving credit facility. NOTE 7 - MINORITY INTEREST On June 28, 2001, the Company dissolved MIM Strategic Marketing, LLC ("Strategic"), a joint venture of which the Company was the majority investor. The Company does not have any repayment obligation to the minority interest 34
investor under Strategic's operating agreement or under the laws of the state of its formation. As a result of this dissolution, the minority interest balance of $1,112 has been reclassified to additional paid in capital. NOTE 8 -TREASURY STOCK In February 2001, the Company repurchased 1,298,183 shares of the Company's common stock for $2,596, at a price of $2.00 per share. NOTE 9--COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS The Company has previously disputed several improper reductions of payments by Tennessee Health Partnership ("THP"). In addition, there existed a dispute over whether or not certain items should have been included under the Company's respective capitated arrangements with THP and Preferred Health Plans ("PHP"). In 1999, the Company recorded a special charge of $3,300 for estimated future losses related to these disputes. In early 2001, the Company reached an agreement in principle with THP. The Company paid THP $1,300 in satisfaction of all claims between the parties. The terms of the settlement were favorable to the Company and $1 million of excess reserves no longer required were credited to income during the first quarter of 2001. 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 $900 and the respective parties released each other from any and all liability with respect to past or future claims. This agreement did not have a material effect on the Company's results of operations or financial positions. 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 reorganization under federal bankruptcy laws, was approved by the Chancery Court (the "Court") of the State of Tennessee, and allows Xantus to remain operating as a TennCare(R) MCO, providing full health care related services to its enrollees. Under the Plan, the State, among other things, agreed to loan to Xantus approximately $30,000 to be used solely to repay pre-petition claims of providers, which claims aggregate approximately $80,000. Under the Plan, the Company received $4,200, including $600 of unpaid rebates to Xantus, which the Company was allowed to retain under the terms of the preliminary rehabilitation plan for Xantus. The Company recorded a special charge in 1999 of $2,700 for the estimated loss to the Company due to the Plan. A plan for the payment of the remaining amounts has not been finalized and the recovery of any additional amounts is uncertain. In 2001, the Company recorded a $1.5 million adjustment to the TennCare reserve resulting from the collection of receivables from Xantus and the adjustment of related reserves provided for in prior years. In 1998, the Company recorded a $2,200 special charge against earnings in connection with an agreement in principle with respect to a civil settlement of the Federal and State of Tennessee investigation in connection with the conduct of two former officers of the Company, prior to the Company's initial public offering. The definitive agreement covering this settlement was executed on June 15, 2000, and required payment of $775 in 2000, $900 in 2001 and $525 to be paid in 2002. GOVERNMENT REGULATION Various Federal and state laws and regulations affecting the healthcare industry do or may impact the Company's current and planned operations, including, without limitation, Federal and state laws prohibiting kickbacks in government health programs (including TennCare(R)), Federal and state antitrust and drug distribution laws, and a wide variety of consumer protection, insurance and other state laws and regulations. While management believes that the Company is in substantial compliance with all existing laws and regulations material to the operation of its business, such laws and regulations are subject to rapid change and often are uncertain in their application. As controversies continue to arise in the healthcare industry (for example, regarding the efforts of plan sponsors and pharmacy benefit managers to limit formularies, alter drug choice and establish limited networks of participating pharmacies), Federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which on the Company cannot be predicted. There can be no assurance that the Company will not be subject to scrutiny or challenge under one or more of these laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material adverse effect upon the Company's financial position and results of operations. Violation of the Federal anti-kickback statute, for example, may result in substantial criminal penalties, as well as exclusion from the Medicare and Medicaid (including TennCare) programs. Further, there can be no assurance that the Company will be able to obtain or maintain any of the regulatory approvals that may be required to operate its business, and the failure to do so could have a material adverse effect on the Company's financial position and results of operations. 35
The Company entered into a corporate integrity agreement with the Office of Inspector General (the "OIG") within the Department of Health and Human Services ("HHS") in connection with the Global Settlement Agreement entered into with the OIG and the State of Tennessee in June 2000. In order to assist the Company in maintaining compliance with laws and regulations and the corporate integrity agreement the Company implemented its corporate compliance program in August of 2000. This program includes educational training for all employees on compliance with laws and regulations relevant to the Company's business and operations and a formal program of reporting and resolution of possible violations of laws or regulations, as well as increased oversight by the OIG. Should the oversight procedures reveal credible evidence of any violation of federal law, the Company is required to report such potential violations to the OIG and the Department of Justice ("DOJ"). The Company is therefore subject to increased regulatory scrutiny and, if the Company commits legal or regulatory violations, they may be subject to an increased risk of sanctions or penalties, including exclusion from participation in the Medicare or Medicaid programs. The Company anticipates maintaining certain compliance related oversight procedures after the expiration of the corporate integrity agreement in June 2005. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with certain key employees that expire at various dates through February 2004. Total minimum commitments under these agreements are approximately as follows: 2002 ................................ $1,002 2003 ................................ 921 2004 ................................ 49 ------ Total ............................... $1,972 ====== OPERATING LEASES The Company leases its facilities and certain equipment under various operating leases. The future minimum lease payments under these operating leases at December 31 are as follows: 2002 ................................. $1,275 2003 ................................. 1,181 2004 ................................. 1,046 2005 ................................. 915 2006 ................................. 931 Thereafter ........................... 2,345 ------ Total ................................ $7,693 ====== Rent expense for non-related party leased facilities and equipment was approximately $1,439, $1,292 and $995 for the years ended December 31, 2001, 2000 and 1999, respectively. CAPITAL LEASES The Company leases certain equipment under various capital leases. Future minimum lease payments under the capital lease agreements at December 31, 2001 are as follows: 36
2002 ........................................................... $ 720 2003 ........................................................... 670 2004 ........................................................... 420 2005 ........................................................... 35 ------ Total minimum lease payments ................................... 1,845 Less: Amount representing interest ............................ 220 ------ Obligations under leases ....................................... 1,625 Less: Current portion of lease obligations .................... 594 ------ $1,031 ====== NOTE 10--INCOME TAXES The effect of temporary differences that give rise to a significant portion of federal deferred taxes is as follows as of December 31: <TABLE> <CAPTION> 2001 2000 ---- ---- <S> <C> <C> Deferred tax assets (liabilities): ....................................... $ 2,181 $ 4,063 Reserves not currently deductible ...................................... (596) (273) Goodwill and intangibles ............................................... 4,944 8,123 Federal net operating loss carryforwards generated from operations ..... 9,145 7,453 Federal net operating loss carryforwards generated from stock options .. 140 220 -------- -------- Property basis differences ............................................. 15,814 19,586 Subtotal .......................................................... (15,814) (19,586) -------- -------- Less: valuation allowance Net deferred taxes ................................................ $ - $ - ======== ======== </TABLE> The Company's reconciliation of the expected Federal provision (benefit) rate to the effective income tax rate is as follows: <TABLE> <CAPTION> 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> Tax provision (benefit) at statutory rate .................................... $ 5,297 $ (582) $(1,286) State tax provision (benefit) , net of Federal taxes ......................... 629 110 (250) Change in the valuation allowance relating to deferred tax assets/liabilities generated from operations................... (5,464) 357 1,088 Amortization of goodwill and other intangibles ............................... 359 361 431 Other ........................................................................ 111 (136) 17 ------- ------- ------ Provision for income taxes .............................................. $ 932 $ 110 $ - ======= ======= ====== </TABLE> At December 31, 2001, the Company had unused Federal net operating loss carryforwards of $40,253, which will begin expiring in 2009. In the opinion of management, as the Company has not had history of consistent profitability, it is uncertain whether the Company will realize the benefit from its deferred tax assets and has provided a valuation allowance. 37
As of December 31, 2001, certain of the company's Federal net operating loss carryforwards are subject to limitation and may be utilized in a future year upon release of the limitation. If Federal net operating loss carryforwards are not utilized in the year they are available they may be utilized in a future year to the extent they have not expired. The following table lists the Company's available Federal net operating loss carryforwards in future years: Generated Generated From From Stock Operations Options Total ---------- ------- ----- 2002 $14,127 $ 2,518 $16,645 2003 - 4,780 4,780 2004 - 2,700 2,700 2005 - 2,700 2,700 2006 - 2,700 2,700 Thereafter - 10,728 10,728 ------- ------- ------- Total unused Federal net operating $14,127 $26,126 $40,253 loss carryforwards ======= ======= ======= NOTE 11--STOCKHOLDERS' EQUITY STOCK OPTIONS The 1996 Incentive Stock Plan (the "1996 Plan") provided for the granting of incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") to employees, directors and consultants of the Company. Under the 1996 Plan there were 5,200,450 shares authorized for issuance. In 2001, the stockholders approved the Company's 2001 Incentive Stock Plan (the "2001 Plan," collectively with the 1996 Plan, the "Plans"). Under the 2001 Plan an additional 950,000 shares were authorized for issuance. As of December 31, 2001, 19,193 shares and 74,000 shares remained available for grant under the 1996 Plan and the 2001 Plan, respectively. Options granted under the Plans vest over a three-year period and, in certain limited instances, fully vest upon a change in control of the Company. In addition, such options generally are exercisable for 10 years after the date of grant, subject in some cases, to earlier termination in certain circumstances. The exercise price of ISOs granted under the Plans will not be less than 100% of the fair market value on the date of grant (110% for ISOs granted to more than a 10% stockholder). If NQSOs are granted at an exercise price less than fair market value on the grant date, the amount by which fair market value exceeds the exercise price will be charged to compensation expense over the period the options vest. As of December 31, 2001 and 2000, the exercisable portion of outstanding options was 874,699 shares and 924,879 shares, respectively. Stock option activity under the Plans through December 31, 2001 is as follows: 38
<TABLE> <CAPTION> Average Options Price ------- ----- <S> <C> <C> <C> <C> Balance, December 31, 1998 .............................. 2,084,009 $ 4.1132 Granted ............................................ 969,000 $ 1.8207 Canceled ........................................... (292,202) $ 5.8581 Exercised .......................................... (738,450) $ 0.0067 --------- -------- Balance, December 31, 1999 .............................. 2,022,357 $ 4.2621 Granted ............................................ 615,000 $ 2.1960 Canceled ........................................... (360,027) $ 1.3852 Exercised .......................................... (105,167) $ 3.1657 --------- -------- Balance, December 31, 2000 .............................. 2,172,163 $ 4.2070 Granted ............................................ 1,107,000 $ 8.1885 Canceled ........................................... (215,999) $ 3.4262 Exercised .......................................... (510,831) $ 4.2416 --------- -------- Balance, December 31, 2001 .............................. 1,656,333 $ 5.7929 ========= ======== </TABLE> On April 17, 1998, the Company granted a former officer an option to purchase 1,000,000 shares of Common Stock at $4.50 (then-current market price) in connection with his employment agreement to become the Company's President, Chief Operating Officer and Chief Financial Officer. This option was not granted under the Plan. During 2001, all of the options granted to the former officer were exercised. The 1996 Directors Stock Incentive Plan, (the "Directors Plan") was adopted to attract and retain qualified individuals to serve as non-employee directors of the Company ("Outside Directors"), to provide incentives and rewards to such directors and to associate more closely the interests of such directors with those of the Company's stockholders. The Directors Plan provides for the automatic granting of non-qualified stock options to Outside Directors joining the Company. Each such Outside Director receives an option to purchase 20,000 shares of Common Stock upon his or her initial appointment or election to the Board of Directors. The exercise price of such options is equal to the fair market value of the Common Stock on the date of grant. Options granted under the Directors Plan vest over three years. 300,000 shares are authorized under the Directors Plan. During 2001, options to purchase 20,000 shares at an exercise price of $13.00 were canceled. As of December 31, 2001, options to purchase 60,000 shares are outstanding at an average exercise price of $5.80. At December 31, 2001, 86,667 shares under the Directors Plan were exercisable. ACCOUNTING FOR STOCK-BASED COMPENSATION The fair value of the Company's compensation cost for stock option plans for employees and directors, had it been determined, in accordance with SFAS 123, would have been as follows for the years ended December 31: <TABLE> <CAPTION> 2001 2000 1999 ---- ---- ---- As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- ----------- --------- <S> <C> <C> <C> <C> <C> <C> Net income (loss) .................. $ 14,202 $ 12,258 $ (1,823) $ (4,051) $ (3,785) $ (6,019) Basic income (loss) per common share ............... $ 0.67 $ 0.58 $ (0.09) $ (0.20) $ (0.20) $ (0.32) Diluted income (loss) per common share ............... $ 0.64 $ 0.55 $ (0.09) $ (0.20) $ (0.20) $ (0.32) </TABLE> Because the fair value method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation expense may not be representative of the amount of compensation expense to be recorded in future years. As pro forma compensation expense for options granted is recorded over the vesting period, future pro forma compensation expense may be greater as additional options are granted. 39
The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2001 2000 1999 Volatility 104.4% 106.6% 95.5% Risk-free interest rate 1.25% 6.25% 6.00% Expected life of options 4 years 4 years 4 years The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. PERFORMANCE SHARES Under the Plans, the Company's Board of Directors may grant stock to key employees. The Board of Directors may make the issuance of common stock subject to the satisfaction of one or more employment, performance, purchase or other conditions. As of December 31, 2001, the Company has granted 230,000 restricted stock grants (the "Performance Shares") that vest 8 years from the date of grant, or earlier if the Company exceeds certain earnings per share levels in 2001 and 2002. During 2001, the Company did not meet the earnings per share levels to accelerate vesting of the Performance Shares. The Company has recorded cumulative compensation expense of $217 related to these Performance Shares through December 31, 2001 based on the fair market value at the date of grant. PERFORMANCE UNITS Under the Plans, performance units may be granted by the Company's Board of Directors to key employees. The terms and conditions of the performance units including the performance goals, the performance period and the value for each performance unit are established by the Company's Board of Directors. If the performance goals are satisfied, the Company shall pay the key employee an amount in cash equal to the value of each performance unit at the time of payment. In no event shall a key employee receive an amount in excess of $1,000 in respect of performance units for any given year. During 2001 and 2000, performance goals were not satisfied, thus there were no amounts paid to employees related to performance. As of December 31, 2001, there are 241,500 performance units outstanding. If the Company exceeds $30,000, $37,500 or $45,000,000 net after tax earnings levels during the year ending December 31, 2002, the Company would have to pay the performance unit value of $10.00, $25.00 or $40.00, respectively, multiplied by the number of units held by each employee. NOTE 12--CONCENTRATION OF CREDIT RISK The following table outlines contracts with Plan Sponsors having revenues and/or accounts receivable that individually exceeded 10% of the Company's total revenues and/or accounts receivables during the applicable time period: 40
<TABLE> <CAPTION> Plan Sponsor -------------------------------------------------- A B C D E -------------------------------------------------- <S> <C> <C> <C> <C> Year ended December 31, 1999 % of total revenue .............................................. 13% * 14% 12% 12% % of total accounts receivable at period end .................... * * 20% * 10% Year ended December 31, 2000 % of total revenue .............................................. 22% 12% 12% * * % of total accounts receivable at period end .................... * 14% 18% * * Year ended December 31, 2001 % of total revenue .............................................. 14% 14% 11% * * % of total accounts receivable at period end .................... * 23% 17% * * </TABLE> - ---------------------------- * Less than 10%. NOTE 13--PROFIT SHARING PLAN The Company maintains a deferred compensation plan under Section 401(k) of the Internal Revenue Code. Under the plan, employees may elect to defer up to 15% of their salary, subject to Internal Revenue Service limits. The Company may make a discretionary matching contribution. The Company recorded matching contributions of $86, $65 and $50 for the years ended December 31, 2001, 2000, and 1999, respectively. NOTE 14--SUBSEQUENT EVENT In January 2002, MIM acquired Vitality Home Infusion Services, Inc., d/b/a Vitality Pharmaceutical Services, a national specialty pharmaceutical provider, based in Roslyn Heights, New York, for $45 million, which was paid, $35 million in cash and $10 million in MIM common stock. The cash portion of the purchase price was funded with proceeds from the primary lender under the existing credit facility. On March 23, 2002, Mr. Richard Friedman, the Company's Chairman and Chief Executive Officer, repaid in full a $1,700 loan, together with all accrued and unpaid interest thereon totalling approximately $2,100. 41
NOTE 15--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of quarterly financial information for fiscal 2001 and 2000 is as follows: <TABLE> <CAPTION> --------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter --------------------------------------------------------------------- 2001: <S> <C> <C> <C> <C> Revenues $ 106,036 $ 106,851 $ 119,886 $ 123,873 Net income $ 3,483 $ 3,210 $ 4,321 $ 3,189 Basic earnings per share $ 0.17 $ 0.16 $ 0.20 $ 0.15 Diluted earnings per share $ 0.17 $ 0.15 $ 0.19 $ 0.14 2000: Revenues $ 80,517 $ 89,107 $ 76,919 $ 91,629 Net income (loss) $ 725 $ 1,082 $ 183 $ (3,813) Basic earnings (loss) per share $ 0.04 $ 0.06 $ 0.01 $ (0.18) Diluted earnings (loss) per share $ 0.04 $ 0.06 $ 0.01 $ (0.18) </TABLE> The net loss for the fourth quarter of 2000 includes a provision for loss of $2,300 related to the Company's investment in WHIS and $2,270 related to legal defense costs for two former officers. Due to changes in the financial situation at WHIS and its ability to access capital, the Company recorded the provision for loss on this investment in December 2000. MIM Corporation and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the years ended December 31, 2001, 2000 and 1999 (In thousands) <TABLE> <CAPTION> Balance at Charged to Beginning of Charges to Costs and Other Balance at Period Receivables Expenses Charges End of Period -------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Year ended December 31, 1999 Accounts receivable .......................... $ 2,039 $ - $ 6,537 $ - $ 8,576 Accounts receivable, other ................... $ 403 $ - $ - $ - $ 403 ==================================================================== Year ended December 31, 2000 Accounts receivable .......................... $ 8,576 $ (814) $ 571 $ - $ 8,333 Accounts receivable, other ................... $ 403 $ (403) $ - $ - $ - ==================================================================== Year ended December 31, 2001 Accounts receivable .......................... $ 8,333 $(3,193) $ 403(1) $ - $ 5,543 Accounts receivable, other ................... $ - $ - $ - $ - $ - ==================================================================== </TABLE> (1) Net in this amount is approximately $1,000 of reserves credited to the Tenncare reserve adjustment for the year ended December 2001, on the statement of operations, upon settlement with THP. 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. Part III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference from the information contained under the captions entitled "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement to be filed with the SEC in connection with our 2002 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information contained under the captions entitled "Executive Compensation," "Summary Compensation Table," "Compensation Committee Interlocks and Insider Participation," "Compensation of Directors," "Compensation Committee Report on Executive Compensation," "Employment Agreements," "Option Grant Table," "Long Term Incentive Plan - Awards in Last Fiscal Year," "Aggregated Options Exercised in Last Fiscal Year and Fiscal Year-End Option Values" and "Stockholder Return Performance Graph" in our definitive proxy statement to be filed with the SEC in connection with our 2002 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the information contained under the caption entitled "Common Stock Ownership by Certain Beneficial Owners and Management" in our definitive proxy statement to be filed with the SEC in connection with our 2002 Annual Meeting of Stockholders. 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information contained under the caption entitled "Certain Relationships and Related Transactions" in our definitive proxy statement to be filed with the SEC in connection with our 2002 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A.) Documents Filed as a Part of this Report <TABLE> <CAPTION> PAGE 1. Financial Statements: <S> <C> Report of Independent Public Accountants...............................................................................22 Consolidated Balance Sheets as of December 31, 2001 and 2000...........................................................23 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999.............................24 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2001, 2000 and 1999....................................................................................25 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.............................26 Notes to Consolidated Financial Statements.............................................................................28 2. Financial Statement Schedules: II. Valuation and Qualifying Accounts for the years ended December 31, 2001, 2000 and 1999.........................................................................................................42 </TABLE> All other schedules not listed above have been omitted since they are not applicable or are not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto. 44
3. Exhibits: Exhibit <TABLE> <CAPTION> Number Description Location - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> 2.1 Agreement and Plan of Merger by and Among MIM Corporation, CMP Acquisition Corp., Continental Managed Pharmacy Services, Inc. and Principal Shareholders dated as of January 27, 1998......................................(4) (Exh. 2.1) 2.2 Purchase Agreement, dated as of August 3, 2000, among American Disease Management Associates, LLC its Members and Certain Related Parties, MIM Health Plans, Inc., and MIM Corporation...............................................(11) (Exh. 2.1) 3.1 Amended and Restated Certificate of Incorporation of MIM Corporation.............................................................(1) (Exh. 3.1) 3.2 Amended and Restated By-Laws of MIM Corporation................................(5) (Exh. 3(ii)) 4.1 Specimen Common Stock Certificate..............................................(4) (Exh. 4.1) 10.1 Drug Benefit Program Services Agreement between Pro-Mark Holdings, Inc. and RxCare of Tennessee, Inc., dated as of March 1, 1994, as amended January 1, 1995......................................(1) (Exh. 10.1) 10.2 Amendment No. 3 to Drug Benefit Program Services Agreement dated October 1, 1998................................................(7) (Exh.10.2) 10.3 Software Licensing and Support Agreement between ComCoTec, Inc. and Pro-Mark Holdings, Inc. dated November 21, 1994..............................................................(1) (Exh. 10.6) 10.4 Indemnity letter from MIM Holdings, LLC dated August 5, 1996.................................................................(1) (Exh. 10.36) 10.5 Employment Agreement between MIM Corporation and Richard H. Friedman dated as of December 1, 1998...............................(7) (Exh.10.14) 10.6 Amendment No. 1 to Employment Agreement dated as of May 15, 1998 between MIM Corporation and Barry A. Posner ....................................................................(6) (Exh. 10.50) 10.7 Employment Agreement between MIM Corporation and Barry A. Posner dated as of March 1, 1999 .....................................(7) (Exh.10.17) 10.8 Registration Rights Agreement-I between MIM Corporation and John H. Klein, Richard H. Friedman, Leslie B. Daniels, E. David Corvese and MIM Holdings, LLC dated July 29, 1996 .........................................(1) (Exh. 10.30) 10.9 Registration Rights Agreement-II between MIM Corporation and John H. Klein, Richard H. Friedman and Leslie B. Daniels dated July 29, 1996 .....................................(1) (Exh. 10.31) 45
10.10 Registration Rights Agreement-III between MIM Corporation and John H. Klein and E. David Corvese dated July 29, 1996 ...........................................................(1) (Exh. 10.32) 10.11 Registration Rights Agreement-IV between MIM Corporation and John H. Klein, Richard H. Friedman, Leslie B. Daniels, E. David Corvese and MIM Holdings, LLC dated July 31, 1996 .........................................(1) (Exh. 10.34) 10.12 Registration Rights Agreement-V between MIM Corporation and Richard H. Friedman and Leslie B. Daniels dated July 31, 1996 ...................................................(1) (Exh. 10.35) 10.13 Amendment No. 1 dated August 12, 1996 to Registration Rights Agreement-IV between MIM Corporation and John H. Klein, Richard H. Friedman, Leslie B. Daniels, E. David Corvese and MIM Holdings, LLC dated July 31, 1996 .........................................(2) (Exh.10.29) 10.14 Amendment No. 2 dated June 16, 1998 to Registration Rights Agreement-IV between MIM Corporation and John H. Klein, Richard H. Friedman, Leslie B. Daniels, E. David Corvese and MIM Holdings, LLC dated July 31, 1996 .........................................(7) (Exh.10.31) 10.15 MIM Corporation 1996 Stock Incentive Plan, as Amended December 9, 1996 ......................................................(2) (Exh. 10.32) 10.16 MIM Corporation 1996 Amended and Restated Stock Incentive Plan, as amended December 2, 1998....................................(7) (Exh.10.33) 10.17 MIM Corporation 1996 Non-Employee Directors Stock Incentive Plan*................................................................(1) (Exh. 10.29) 10.18 Lease between Alchemie Properties, LLC and Pro-Mark Holdings, Inc., dated as of December 1, 1994...........................................................................(1) (Exh. 10.27) 10.19 Lease Agreement between Mutual Properties Stonedale L.P. and MIM Corporation dated April 23, 1997...........................................................................(3) (Exh.10.41) 10.20 Agreement between Mutual Properties Stonedale L.P. and MIM Corporation dated as of April 23, 1997................................. (3) (Exh.10.42) 10.21 Lease Amendment and Extension Agreement between Mutual Properties Stonedale L.P. and MIM Corporation dated December 10, 1997............................................(3) (Exh.10.43) 10.22 Lease Amendment and Extension Agreement-II between Mutual Properties Stonedale L.P. and MIM Corporation dated March 27, 1998...............................................(3) (Exh.10.44) 10.23 Lease Agreement between Mutual Properties Stonedale L.P. and Pro-Mark Holdings, Inc., dated December 23, 1997..............................................................(3) (Exh.10.45) 46
10.24 Amended and Restated 1996 Non-Employee Directors Stock Incentive Plan (effective as of March 1, 1999)...........................(8) (Exh.10.60) 10.25 Amendment No. 1 to Employment Agreement, dated as of October 11, 1999 between MIM Corporation an Richard H. Friedman ........................................(9) (Exh.10.60) 10.26 Form of Performance Shares Agreement ..........................................(9) (Exh.10.61) 10.27 Form of Performance Units Agreement............................................(9) (Exh.10.62) 10.28 Form of Non-Qualified Stock Option Agreement*..................................(9) (Exh.10.63) 10.29 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..................................................................(10) (Exh. 10.2) 10.30 Loan and Security Agreement, dated November 1, 2000, between MIM Funding LLC and HFG Healthco-4 LLC.................................(12) (Exh. 10.1) 10.31 Receivables Purchase and Transfer Agreement, dated as of November 1, 2000, among MIM Health Plans, Inc., Continental Pharmacy, Inc., American Disease Management Associates LLC and MIM Funding LLC.............................................(12) (Exh. 10.2) 10.32 Lease Agreement, dated as of February 24, 2000, by and between American Duke-Weeks Realty Limited Partnership and Continental Managed Pharmacy Services, Inc.................................(13) (Exh. 10.68) 10.33 First Lease Amendment, dated as of February 24, 2000, by and between Duke-Weeks Realty Limited Partnership and Continental Managed Pharmacy Services, Inc.................................(13) (Exh. 10.69) 10.34 Lease Agreement, dated as of July 22, 1996, by and between American Disease Management Associates, LLC ("ADIMA") and Regent Park Associates.....................................................(13) (Exh. 10.70) 10.35 First Amendment of Agreement of Lease, dated as of June 15, 1999, by and between ADIMA and Five Regent Park Associates.....................(13) (Exh. 10.71) 10.36 Second Amendment of Agreement of Lease, dated as of February 11, 2000, by and between ADIMA and Five Regent Park Associates.....................................................................(13) (Exh. 10.72) 47
10.37 Employment Letter, dated as of February 8, 1999, between the Company and Recie Bomar ...................................................(13) (Exh. 10.73) 10.38 Asset Purchase Agreement, dated April 4, 2001 among Continental Managed Pharmacy Services Inc., Community Prescription Service, Inc., and its Stockholders..............................(14) (Exh. 10.74) 10.39 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, File No. 333-05327).....................................(15) (Exh. 3.1) 10.40 Amended and Restated By-Laws of the Registrant (incorporated by reference to Exhibit 3(ii) to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998)...........................................(15) (Exh. 3.2) 10.41 Amended and Restated Rights Agreement dated as of May 20, 1999, between the Registrant and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 4.1 to Post-Effective Amendment No. 2 to the Registrant's Form 8-A/A dated May 20, 1999).......................(15) (Exh. 4.1) 10.42 Purchase Agreement among American Disease Management Associates, L.L.C., its Members and Certain Related Partners, MIM Health Plans, Inc. and the Registrant, dated as of August 3, 2000 (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed August 10, 2000).........................................................(15) (Exh. 4.2) 10.43 Registration Rights Agreement between the Registrant and Livingston Group LLC dated as of August 3, 2000 (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed August 10, 2000).........................................................(15) (Exh. 4.3) 10.44 Consent of Arthur Andersen LLP.................................................(15) (Exh. 23.2) 10.45 Employment letter, dated as of June 21, 2001, between MIM Corporation and Donald Foscato ...............................................(16) (Exh. 10.75) 10.46 Employment letter, dated as of June 18, 2001, between MIM Health Plans, Inc. and Donald Dindak .........................................(16) (Exh. 10.76) 10.47 Employment letter, dated as of June 19, 2001, between MIM Health Plans, Inc and Michael Sicilian .......................................(16) (Exh. 10.77) 10.48 Purchase Agreement, dated as of January 9, 2002, among Vitality Home Infusion Services, Inc., Marc Wiener, Barbara Kammerer and MIM Corporation............................................................(17) (Exh. 2.1) 10.49 Lease Agreement, dated as of January 31, 2002, between Bar-Marc Realty, LLC, as landlord, and Vitality Home Infusion Services, Inc., as Tenant 10.50 Guaranty of Lease Agreement, dated January 31, 2002, made by the Company in favor of Bar-Marc Realty, LLC 48
10.51 Employment Letter, dated October 15, 2001, between the Company and Russel J. Corvese 10.52 Amendment, dated October 15, 2001, to Employment Letter, dated as of February 8, 1999, between the Company and Recie Bomar 21 Subsidiaries of the Company 99.1 Letter to SEC pursuant to Temporary Note 3T </TABLE> - -------------------------------------------------- (1) Incorporated by reference to the indicated exhibit to the Company's Registration Statement on Form S-1 (File No. 333-05327), as amended, which became effective on August 14, 1996. (2) Incorporated by reference to the indicated exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (3) Incorporated by reference to the indicated exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (4) Incorporated by reference to the indicated exhibit to the Company's Registration Statement on Form S-4 (File No. 333-60647), as amended, which became effective on August 21, 1998. (5) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998. (6) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998, as amended. (7) Incorporated by reference to the indicated exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 49
(8) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999. (9) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999. (10) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000. (11) Incorporated by reference to the indicated exhibit to the Company's Current Report on Form 8-K filed on August 10, 2000. (12) Incorporated by reference to the indicated exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2000. (13) Incorporated by reference to the indicated exhibit to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (14) Incorporated by reference to the indicated exhibit to the company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001. (15) Incorporated by reference to the indicated exhibit to the company's Form S-3 filed on July 12, 2001. (16) Incorporated by reference to the indicated exhibit to the company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2001. (17) Incorporated by reference to the indicated exhibit to the company's Form 8-K filed on February 5, 2002. (B) Reports on Form 8-K NONE 50
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 2001. MIM CORPORATION /s/ Donald A. Foscato ------------------------------- Donald A. Foscato Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title(s) Date - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> Chairman and Chief Executive Officer March 29, 2002 /s/ Richard H. Friedman (principal executive officer) - --------------------------------- Richard H. Friedman Chief Financial Officer and Treasurer March 29, 2002 /s/ Donald A. Foscato (principal financial officer) - --------------------------------- Donald A. Foscato /s/ Louis DiFazio, PhD Director March 29, 2002 - --------------------------------- Louis DiFazio, PhD /s/ Louis A. Luzzi, Ph.D. Director March 29, 2002 - --------------------------------- Louis A. Luzzi, Ph.D. /s/ Richard A. Cirillo Director March 29, 2002 - --------------------------------- Richard A. Cirillo /s/ Michael Kooper Director March 29, 2002 - --------------------------------- Michael Kooper /s/ Ronald Shelp Director March 29, 2002 - --------------------------------- Ronald Shelp /s/ Harold Ford Director March 29, 2002 - --------------------------------- Harold Ford </TABLE> 51
EXHIBIT INDEX (Exhibits being filed with this Annual Report on Form 10-K) 10.49 Lease Agreement, dated as of January 31, 2002, between Bar-Marc Realty, LLC, as landlord, and Vitality Home Infusion Services, Inc., as Tenant 10.50 Guaranty of Lease Agreement, dated January 31, 2002, made by the Company in favor of Bar-Marc Realty, LLC 10.51 Employment Letter, dated October 15, 2001, between the Company and Russel J. Corvese 10.52 Amendment, dated October 15, 2001, to Employment Letter, dated as of February 8, 1999, between the Company and Recie Bomar 21 Subsidiaries of the Company 99.1 Letter to SEC pursuant to Temporary Note 3T 52