CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31, June 30,
1997 1998
---------- ----------
(unaudited)
ASSETS
Current Assets
Cash & equivalents ..................................... $ 166 $ 628
Receivables ............................................ 9,911 9,402
Inventories ............................................ 779 902
Prepaid expenses ....................................... 95 336
Deferred income taxes .................................. 239 235
---------- ----------
Total current assets ...................... 11,190 11,503
Property & equipment, net .............................. 704 552
Goodwill, net .......................................... 4,364 4,260
Deferred income taxes .................................. 35 35
Other assets ........................................... 15 30
Other intangible assets, net ........................... 937 1,190
---------- ----------
Total assets .............................. $ 17,245 $ 17,570
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of capital lease obligations ........... $ 26 $ 15
Current portion of long term debt ...................... 340 288
Accounts payable ....................................... 4,295 5,054
Claims payable ......................................... 1,171 1,029
Accrued expenses ....................................... 1,429 1,065
Income taxes payable ................................... 510 782
---------- ----------
Total current liabilities ................. 7,771 8,233
Other non-current liabilities .......................... 199 54
Capital lease obligations, less current portion ........ 21 17
Long-term debt, less current portion ................... 4,069 3,152
Shareholders' Equity
Common stock ........................................... 12 12
Additional paid-in capital ............................. 4,309 4,584
Retained earnings ...................................... 864 1,518
---------- ----------
Total shareholders' equity ................ 5,185 6,114
---------- ----------
Total liabilities & shareholders' equity .. $ 17,245 $ 17,570
========== ==========
See notes to unaudited consolidated financial statements
F-1
CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share and per share amounts)
Six months ended June 30,
1997 1998
--------------- ---------------
Revenues ..................................................... $ 18,064 $ 30,764
Cost of revenues ............................................. 13,410 24,477
--------------- ---------------
Gross profit .......................................... 4,654 6,287
Selling, general & administrative expenses ................... 4,377 4,824
--------------- ---------------
Operating profit ...................................... 277 1,463
Interest expense ............................................. (139) (163)
--------------- ---------------
Income before provision for income taxes .............. 138 1,300
Income taxes ................................................. 111 646
--------------- ---------------
Net income ............................................ $ 27 $ 654
=============== ===============
Basic and diluted earnings per share ......................... $ 2.33 $ 56.14
=============== ===============
Weighted average shares used to compute earnings per share ... 11,600 11,649
=============== ===============
See notes to unaudited consolidated financial statements
F-2
CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months ended June 30,
----------------------------
1997 1998
------------ ------------
Operating activities
Net income ................................................ $ 27 $ 654
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 306 346
Changes in operating assets and liabilities:
Accounts receivable ................................ (475) 509
Inventory .......................................... (199) (123)
Prepaid expenses and other assets .................. 20 (257)
Accounts payable ................................... 588 759
Claims payable ..................................... (42) (142)
Accrued commissions, wages and payroll related items 1 (363)
Income taxes ....................................... (54) 272
Other liabilities .................................. 75 (145)
------------ ------------
Net cash provided by operating activities ..... 247 1,510
------------ ------------
Investing activities
Purchases of property and equipment, net .................. (64) (28)
Purchase of SRX pharmacy .................................. (1) (311)
------------ ------------
Net cash used in investing activities ........ (65) (339)
------------ ------------
Financing activities
Proceeds on line of credit ................................ 11,382 21,515
Payments on line of credit ................................ (11,475) (22,315)
Proceeds on note receivable ............................... 95 0
Payments on capital leases ................................ (23) (14)
Payments on notes payable ................................. (166) (169)
Proceeds from stock issuance .............................. 0 274
------------ ------------
Net cash used in financing activities ......... (187) (709)
------------ ------------
Increase (decrease) in cash ................................. (5) 462
Cash at beginning of period .................................. 244 166
------------ ------------
Cash at end of period ........................................ $ (239) $ 628
============ ============
See notes to unaudited consolidated financial statements
F-3
CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended December 31, 1997 (Audited) and the
Six months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except share and per share amounts)
A. Description of Business
Continental Managed Pharmacy Services, Inc. (CMPS or the Company) is a
national provider of pharmaceutical benefits management services, plan design
and consultation, and physician billing. Through its subsidiaries, the Company
markets prescription drug programs and provides mail order and network pharmacy
services and billing and administrative services for customers that provide
medical and health care cost containment services.
On January 28, 1998, the Company announced the signing of a merger
agreement with MIM Corporation under which all of the shares of the Company's
common stock would be exchanged for shares of common stock of MIM Corporation
(the "Merger"). The Merger was consummated on August 24, 1998.
B. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of CMPS and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Net Revenue and Accounts Receivable
Net revenue and the related accounts receivable for services rendered are
reported at the estimated net realizable amounts from customers and third-party
payors. The allowance for uncollectible accounts receivable was approximately
$639 at December 31, 1997 and $690 at June 30, 1998.
Inventory
Inventory is stated at the lower of cost or market. The cost of the
inventory is determined using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated on the basis of cost. Depreciation on
furniture and equipment is computed on a straight-line basis over the estimated
useful lives of the related assets. Leasehold improvements and leased assets are
amortized on a straight-line basis over the lesser of the related lease term or
estimated useful life of the asset. Amortization of capital leased assets is
included in depreciation expense. The estimated useful lives of the assets are
as follows:
Machinery and equipment................................... 5 years
Computer equipment........................................ 3-5 years
Furniture, fixtures and leasehold improvements............ 7 years
Depreciation expense was $155 and $181 for the six months ended June 30,
1997 and 1998, respectively.
Intangible Assets
Goodwill, less accumulated amortization of $831 at December 31, 1997 and
$935 on June 30, 1998, represents the cost in excess of the fair value of net
assets acquired and is amortized using the straight-line method over a period of
15 to 25 years. Other intangible assets, less accumulated amortization of $238
at December 31, 1997 and $296 on June 30, 1998, consist of customer records and
files and organizational costs which are amortized using the straight-line
method over 5 to 15 years, and a five year non-compete agreement which is being
amortized over the term of the agreement.
F-4
CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended December 31, 1997 (Audited) and the
Six months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except share and per share amounts)
B. Summary of Significant Accounting Policies - Continued
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
taxes are recognized based on temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
Financial Instruments
The fair value of long-term debt is estimated based on the present value of
the underlying cash flows discounted at the Company's estimated borrowing rate.
At December 31, 1997 and June 30, 1998, the fair value of long-term debt
approximates its carrying value.
Stock Options
CMPS applies the intrinsic value based method in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees, to account for options granted to employees and directors to purchase
common shares. Accordingly, no compensation expense is recognized on the grant
date since at that date the option price is equal to the estimated fair market
value of the underlying common shares.
Earnings Per Share
Earnings per Common Share are calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." issued by the
Financial Accounting Standards Board during 1997. Basic earnings per share are
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if securities to issue
common shares were converted into common shares. Such common shares consist of
shares issuable upon exercise of stock options computed by using the treasury
stock method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results may differ from those
estimates.
C. Long-Term Debt
In March 1997, the Company extended its Revolving Note Agreement (the
Agreement) with a bank (the "Bank") through May 1999. The Company can borrow up
to $6.5 million under the Agreement. Advances are limited to 85% of eligible
receivables, as defined, and outstanding amounts bear interest at the bank's
prime rate plus .75% through August 24, 1998 and the Bank's prime rate
thereafter (9.25% at December 31, 1997 and 9.25% at June 30, 1998). At December
31, 1997, $2,994 was available and on June 30, 1998, $3,794 was available for
borrowing under the Agreement.
The Company has two Installment Notes (Installment Notes I and II).
Installment Note I bears interest at the Bank's prime rate plus 1.25% (9.75% at
December 31, 1997 and 9.75% at June 30, 1998). Payments are due in monthly
installments of $9 plus interest, with the final payment due February 1, 2000.
Installment Note II bears interest at the same rate as Installment Note I.
Payments of principal of $14 plus interest are made monthly on Installment Note
II with the final payment due February 28, 1999.
The Agreement and Installment Notes I and II are secured by accounts
receivable and furniture and equipment of the Company and until August 24, 1998
were personally guaranteed by a shareholder up to $1 million. From and after
August 24, 1998, the personal guaranty was released and replaced with an
unlimited guaranty by MIM Corporation, the Company's parent company following
the Merger. The Company has also granted a security interest in the inventory,
accounts receivable and furniture and equipment to a vendor (the "Supplier").
F-5
CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended December 31, 1997 (Audited) and the
Six months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except share and per share amounts)
Long-Term Debt - Continued
Under the terms of an Inter Creditor Agreement among the Company, the Bank
and the Supplier, the Supplier will not exercise any right or remedy it may have
with respect to the Bank's collateral, until the amounts owed to the Bank are
fully paid and satisfied and the Bank's security interests have been terminated
in writing. The Inter Creditor Agreement does not preclude the Supplier from
taking such action to enforce payment of indebtedness to the Supplier not
involving collateral of the Bank. Under the terms of the Agreement and
Installment Notes, the Company is required to comply with certain financial
covenants which among other matters require the Company to maintain a specified
level of net worth.
The Company has notes payable outstanding to a former shareholder (now a
stockholder of MIM as a result of the Merger). The notes bear interest at the
greater of 9% or prime plus 1% (9.5% at December 31, 1997 and 9.25% at June 30,
1998) and are payable in monthly installments of principal and interest of $7
through June 30, 2001.
Long-term debt consists of the following at:
December 31, June 30, 1998
1997
--------------- ---------------
Master revolving note ...................... $ 3,506 $ 2,706
Variable rate Installment Notes I and II ... 641 504
Notes payable--shareholder ................. 262 230
--------------- ---------------
4,409 3,440
Less current portion ....................... 340 288
--------------- ---------------
$ 4,069 $ 3,152
=============== ===============
After December 31, 1997, future maturities of long-term debt for the next
five years are as follows: 1998--$340; 1999--$3,714; 2000--$312; 2001--$43; and
2002--$0.
D. Leases
The Company is obligated under various capital leases for certain equipment
that expire at various dates during the next 5 years. The carrying amount of
equipment and the related accumulated amortization recorded under capital leases
is as follows:
December 31, 1997 June 30, 1998
----------------- -------------
Equipment ................................ $ 115 $ 115
Less accumulated amortization ............ 61 83
--------- --------
$ 54 $ 32
========= ========
The Company also has several operating leases, primarily for office space
and equipment, that expire at various times through 1998. Rent expense was $54
and $54 for the six months ending June 30, 1997 and 1998, respectively.
F-6
CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended December 31, 1997 (Audited) and the
Six months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except share and per share amounts)
D. Leases--Continued
Future minimum lease payments under noncancelable leases as of December 31,
1997 are:
Capital Operating
Leases Leases
---------- ---------
At December 31:
1998 ......................................... $ 29 $ 84
1999 ......................................... 8
2000 ......................................... 8
2001 ......................................... 8
---------- ---------
Total minimum lease payments .................... 53 $ 84
==========
Less amount representing interest ............... 6
----------
Present value of minimum capital lease payments.. $ 47
==========
During the six months ending June 30, 1998, the Company did not enter into
any noncash investing activities related to capital lease obligations.
E. Other Liabilities
Accrued wages, commissions and other liabilities consist of the following:
December 31,
1997 June 30, 1998
--------------- ---------------
Commissions .............................. $ 725 $ 429
Wages .................................... 420 350
Other .................................... 284 286
---------- --------
$ 1,429 $ 1,065
========== ========
Other noncurrent liabilities primarily consist of a customer advance.
F. Stock Options
The Company maintains an Employee and Director Stock Option Plan (the
"Plan"). The Plan authorizes the granting of options to qualified individuals,
as defined, to purchase up to 400 shares of common stock. Options granted under
the Plan are exercisable at not less than the fair market value at the date of
grant and expire five years from the date of grant. All options granted under
the Plan vest six months after the date of grant.
The following is a summary of stock option activity during the year ended
December 31:
1995 1996 1997
------- ------- -------
Outstanding at beginning of year ($800 per share) 66.875 195.625 256.250
Granted ($800 per share) ........................ 128.750 90.625 86.875
Forfeited ....................................... (30.000)
------- ------- -------
Outstanding at end of year ($800 per share) ..... 195.625 256.250 343.125
======= ======= =======
Exercisable at end of year ...................... 151.250 211.250 300.625
======= ======= =======
F-7
CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended December 31, 1997 (Audited) and the
Six months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except share and per share amounts)
F. Stock Options - Continued
The Company applies APB 25 in accounting for stock options. Accordingly, no
compensation cost has been recognized for its stock options because the exercise
price of the Company's stock options equals the market price of the underlying
stock on the date of grant. Had compensation cost for the stock options granted
been determined based on the fair value at grant date, consistent with the fair
value method of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, the Company's net income would have
been reduced by $2, $5 and $8 in 1995, 1996 and 1997, respectively. The fair
value of the stock option at the grant date was determined using the minimum
value method with an assumed risk free interest rate of 5.38% in 1995, 7.41% in
1996, and 6.50% in 1997. A five year average life was used for all years. The
pro forma results are not necessarily indicative of what would have occurred had
the Company adopted SFAS No. 123.
All outstanding stock options were exercised on June 22, 1998 in
anticipation of the Merger. No additional stock options will be granted under
the Plan.
G. Income Taxes
A summary of income tax expense for the six months ending June 30, 1997 and
1998 is as follows:
June 30, 1997 June 30, 1998
--------------- ---------------
Current:
Federal ................................... $ 81 $ 527
State and local ........................... 19 104
--------- ---------
110 631
Deferred:
Federal ................................... 1 14
State and local ........................... 0 1
--------- ---------
1 15
--------- ---------
$ 111 $ 646
========= =========
The income tax rate for financial reporting purposes for the six months
ending June 30, 1997 and 1998 varied from the Federal statutory rate as follows:
June 30, 1997 June 30, 1998
------------ ------------
Federal statutory income tax rate ................ 34.0% 34.0%
Increase (decrease):
State and local taxes, net of Federal benefit . 18.9 4.5
Goodwill amortization ......................... 31.8 4.9
Other, net .................................... (4.3) 6.3
------- -------
Effective income tax rate ........................ 80.4% 49.7%
======= =======
F-8
CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended December 31, 1997 (Audited) and the
Six months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except share and per share amounts)
G. Income Taxes - Continued
Significant components of the Company's deferred tax liabilities and assets are
as follows:
December 31, June 30,
1997 1998
------------ --------
Deferred tax liabilities:
Tax over book depreciation ............... $ 3 $ 3
Deferred tax assets:
Allowance for doubtful accounts .......... 174 174
State taxes .............................. 29 29
Accrued expenses ......................... 74 70
-------- --------
Total deferred tax assets ..... 277 273
-------- --------
Net deferred tax assets ..................... $ 274 $ 270
======== ========
H. Employee Benefit Plans
The Company maintains a defined contribution 401(k) plan covering
substantially all employees who have completed three months of service.
Contributions by the Company are discretionary. Costs related to the 401(k)
totaled $34 for the six months ending June 30, 1997 and $26 for the six months
ending June 30, 1998.
I. Related Party Transactions
Preferred Rx., Inc. (Preferred) had an agreement with an entity owned by a
shareholder of CMPS whereby the entity provided various marketing related
services to Preferred. Preferred agreed to pay 1.5% of the monthly cash receipts
collected from its non-corporate customers for such services. Commission expense
was $97 for the six months ending June 30, 1997 and $102 for the six months
ending June 30, 1998. This agreement was terminated in connection with the
Merger.
J. Acquisitions and 1994 Reorganization
On July 25, 1997, the Company acquired certain assets of Rx Advantage,
Inc., a provider of pharmaceutical benefits management services, for $150 plus
direct acquisition costs. The excess of the purchase price paid over the fair
value of the net assets acquired has been recorded as goodwill and is being
amortized over 15 years. The acquisition has been accounted for under the
purchase method of accounting, and the consolidated results of operations
include the results of the business from the date of acquisition. The terms of
the purchase agreement require the Company to make additional payments through
1999 based on prescription volume. During 1997, the Company has paid or accrued
approximately $250 of additional amounts under the purchase agreement which have
increased the recorded amount of goodwill. Unaudited pro forma financial
information for the six months ending June 30, 1997 as though the Company had
completed the acquisition at the beginning of 1997 is as follows:
Six Months
ending June 30, 1997
--------------------
Pro forma net revenue............................... $ 26,358
Pro forma net income................................ $ 29
The pro forma operating results are not necessarily indicative of what
would have occurred had the transactions taken place on January 1, 1997.
F-9
CONTINENTAL MANAGED PHARMACY SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended December 31, 1997 (Audited) and the
Six months ended June 30, 1998 and 1997 (Unaudited)
(In thousands, except share and per share amounts)
J. Acquisitions and 1994 Reorganization - Continued
On December 15, 1995, the Company acquired the customer records and files
of a mail order pharmacy organization and obtained noncompete agreements from
the principal shareholders for $405 and $90, respectively. The terms of the
purchase agreement provide for the Company to make additional payments through
1998 contingent upon sales volume. During the first six months of 1997 and 1998,
the Company made contingent payments of $0 and $0, respectively. The acquisition
was accounted for using the purchase method of accounting; accordingly, the
purchase price was allocated to the assets acquired based on their estimated
fair values as set forth in the purchase agreement. The recorded values of
customer records and files (goodwill), have been increased by the amount of
contingent cash payments made in 1996 and 1997, and are being amortized over 15
years.
Goodwill also relates to the Company's plan of reorganization which took
place in 1994. Under the plan, Continental Pharmacy, Inc., Preferred, Automated
Scripts, Inc., and Valley Physician Services, Inc. became wholly-owned
subsidiaries of the Company through a series of business acquisitions accounted
for using the purchase method of accounting. The total cost in excess of net
assets acquired was recorded as goodwill and is being amortized over 25 years.
There was no acquisition or reorganization activity in the six months
ending June 30, 1998.
F-10