The net loss per common share for the years 2000 and 1999 excludes the effect of common stock equivalents, as their inclusion would be antidilutive.
Our Specialty Management and Delivery Services programs are offered to Members who are chronically ill, genetically impaired, or afflicted with potentially life threatening diseases. These services include the distribution of biotech and other prescription medications and the provision of pharmacy-related clinical management services and disease state programs. Specialty services are also offered to physicians (in group practice and hospital settings) on behalf of their patients. These physicians are typically affiliated with Plan Sponsors which in turn have a provider relationship with us.
As part of our PBM and/or Specialty Management and Delivery Services, we offer our customers a wide selection of clinical services including pharmacy case management, therapy assessment, compliance monitoring, health risk assessment, patient education 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, program management and pharmaceutical rebate administration.
Cost of revenue increased $24.0 million to $155.0 million in 2003, compared to $131.0 in 2002. Gross profit declined $0.2 million to $38.3 million for the year ended December 31, 2003. Gross profit percentage declined to 19.8% in 2003 compared to 22.7% in 2002, as a result of increased revenue in lower margin injectable therapy programs as well as decreased revenues and margin erosion at the Long Island, NY distribution center.
The following table provides details for the segment for the years ended December 31, 2003, 2002 and 2001:
Net interest expense remained constant at $0.8 million for 2003 and 2002.
Net interest expense was $0.8 million and $0.06 million for 2002 and 2001, respectively. Interest expense for 2002 was primarily the result of increased borrowings under our revolving credit facility to fund the $35 million cash portion of the Vitality acquisition purchase price.
The provision for income taxes was $6.1 million for 2003 and $4.7 million for 2002. The effective tax rate for 2003 was 40.0% compared to a 20.0% rate for 2002. Compared to our federal NOLs in 2002 and 2001 that reduced the effective tax rate, the remaining federal NOLs are recorded directly in stockholders' equity since they were generated primarily as a result of the exercise of non-qualified stock options in prior years. At December 31, 2003, we had remaining federal net operating losses ("NOLs") of $19.4 million, which begin expiring in 2009. The valuation allowance for the deferred income tax asset decreased $7.5 million in 2003. Management concluded that the valuation allowance was no longer needed and the tax asset will more likely than not be realized based on our strong earnings history for the past three years and other positive factors. Therefore, the total valuation allowance related to our net operating loss carryforwards generated from stock exercises was reversed. The reversal did not affect income or the effective tax rate.
Net income for 2002 increased 32% to $18.7 million, or $0.79 per diluted share, compared to net income of $14.2 million, or $0.64 per diluted share, for 2001. Excluding 2002 and 2001 gains associated with TennCare® reserve adjustments of $0.03 and $0.10 per diluted share, respectively, and the $0.08 per diluted share impact of amortization of goodwill in 2001.
The Company estimates the portion of those pharmacy rebates that are shared with plan sponsors and adjusts pharmacy rebates payable to plan sponsors when the amounts are paid typically on a quarterly basis, or as significant events occur. These estimates are accrued periodically based on actual and estimated claims data and agreed upon contractual rebate sharing rates. The Company adjusts these estimates on a periodic basis based on changing circumstances such as contract modifications, product mix subject to rebates, and changes in the applicable formulary.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, by requiring that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and must be applied prospectively. The adoption of the provisions of SFAS No. 149 in fiscal year 2003 did not impact our financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement established standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 13, 2003 and must be applied prospectively by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of SFAS No. 150 did not effect our financial position or results of operations since we do not currently have any financial instruments with characteristics of both liabilities and equity.
The Company operates in two operating segments: (1) PBM Services, which is comprised of fully integrated pharmacy benefit management and traditional prescription mail services; and (2) Specialty Management and Delivery Services, which is comprised of its BioScrip® specialty injectable and infusion therapy programs for patients who are chronically ill and genetically impaired.
The following table provides a reconciliation of reported net income for the years ended December 31, 2003, 2002 and 2001, to adjusted net income as if SFAS No. 142 had been applied as of January 1, 2001.
As of December 31, 2003 the Company has recorded a net deferred tax asset of $7,789. These primarily consist of federal NOLs generated from stock options. At December 31, 2002 the Company's NOLs had a full valuation allowance against them. During 2003 management concluded that the valuation allowance was no longer needed and the tax asset will more likely than not be realized based on our strong earnings history for the past three years and other positive factors. Therefore, the total valuation allowance related to our net operating loss carryforwards generated from stock options was reversed. The reversal did not affect income or the effective tax rate.
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 $1,000,000 in respect of performance units for any given year. During 2003, 2002 and 2001, performance units were not granted, thus there were no amounts paid to employees related to performance. As of December 31, 2003, there were no performance units outstanding.