Revenue includes: TennCare® PBM Services revenue of $67.8 million, $140.2 million and $141.9 million for the years 2003, 2002 and 2001, respectively; Synagis® revenue of $13.7 million, $14.6 million and $3.7 million for the years 2003, 2002 and 2001, respectively; and Value Options revenue of $19.7 million and $20.8 million for the years 2004 and 2003, respectively. Revenue from TennCare and Synagis ended in 2003. Revenue from Value Options ended in 2004.
Net income in 2004 includes a $0.5 million charge, net of tax, related to a global settlement with Value Options of Texas, Inc.
Effective tax rate (see Management’s Discussion and Analysis for explanation of the change in the effective tax rate).
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, changes in reimbursement rates from government and private payors, the existence of complex laws and regulations relating to our business, increased competition from our competitors, including competitors with greater financial, technical, marketing and other resources. This report contains information regarding important factors that could cause such differences.
We are a specialty pharmacy services provider that distributes prescription drugs, coordinates customer benefits and provides specialized therapy management services for people with certain health conditions, particularly those treated with biotech injectable medications, as well as those afflicted with potentially life threatening or debilitating diseases or genetic disorders and requiring specialty medications. We work with patients, physicians and pharmaceutical manufacturers. We also work directly with a variety of health insurers, including HMO’s, indemnity plans and PPO’s, managed care organizations, other insurance companies, and, to a lesser extent, labor unions, self-funded employer groups, government agencies (including Medicaid and Medicare) and other self-funded plan sponsors, as well as through third-party administrators. We work with all of these constituents in a concerted effort to improve clinical and economic outcomes while enhancing the quality of life for the individuals living with chronic conditions.
Our Specialty Services are provided primarily to patients who either have chronic health conditions or are afflicted with potentially life threatening or debilitating diseases or genetic disorders and require specialty medications. These specialty services include the distribution of biotech and other high cost injectable, oral and infusable prescription medications and the provision of pharmacy-related clinical management services, product administration and disease state programs. Specialty Services are also offered to physicians, in a variety of practice and/or hospital settings, on behalf of their patients. Many of these physicians have network affiliations with Plan Sponsors, who in turn have a relationship with us.
We plan to grow our infusion business through a variety of means. We believe that there are acquisition opportunities that will expand our geographic reach, permitting us to service a greater number of patients and Plan Sponsors under contract. We also plan to broaden our product offering in our current geographic service area by adding new therapies to our current focus on immunological blood products, including our most recent focus on patients with hemophilia. We will also work with physicians who utilize our services to support their in-office infusion activities.
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In preparing our financial statements, we are required to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets
Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. The procedure for estimating the allowance for doubtful accounts requires significant judgment and assumptions. The risk of collection varies based upon the product, the payor (commercial health insurance, government, physician), the patient’s ability to pay the amounts not reimbursed by the payor and point of distribution (retail, national mail). We estimate the allowance for doubtful accounts based upon a variety of factors including the age of the outstanding receivables and our historical experience of collections, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. We periodically review the estimation process and make changes to the estimates as necessary. In the fourth quarter of 2005 we recorded a $7.1 million charge to reflect an increase in the allowance for doubtful accounts receivable created by lower than expected collections during the Chronimed merger integration period.
Manufacturers’ rebates are primarily part of our PBM Services segment and are recorded as estimates until such time as the rebate monies are received. These estimates are based on historical results and trends and are revised on a regular basis depending on our latest forecasts, as well as information received from rebate sources. Should actual results differ, adjustments will be recorded in future earnings. In some instances, rebate payments are shared with our managed care organizations. Shared rebates are recorded as a reduction of revenue. Total rebates are recorded as a reduction of cost of goods sold.
As part of the process of preparing our consolidated financial statements, we estimate income taxes in each of the jurisdictions in which we operate. We account for income taxes under Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes. SFAS No. 109 requires the use of the asset and liability method of accounting for income taxes. Under this method, deferred taxes are determined by calculating the future tax consequences attributable to differences between the financial accounting and tax bases of existing assets and liabilities. A valuation allowance is recorded against deferred tax assets when, in the opinion of management, it is more likely than not that we will be able to realize the benefit from the deferred tax assets. Deferred tax assets that will be utilized within twelve months are classified as current assets.
established at the time an exposure is identified when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. While we believe that we have identified all reasonably identifiable exposures and that the reserve we have established for identifiable exposures is appropriate under the circumstance, it is possible that additional exposures exist and that the exposures will be settled at amounts different than the amounts reserved. It is possible that changes in estimates in the future could cause us to either materially increase or reduce the carrying amount of our income tax reserve.
Effective on January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. This statement addresses the accounting and reporting of goodwill and other intangible assets subsequent to their acquisition. Since adoption, amortization of goodwill was discontinued and goodwill is reviewed at least annually for impairment, generally in the fourth quarter.
We evaluate goodwill for impairment based on a two-step process. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is necessary to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.
We have two reporting units: (i) Specialty Services and (ii) PBM Services. The fair value of the Specialty Services segment exceeded its carrying amount resulting in no impairment charges in fiscal year 2005. The fair value of the PBM Services segment was less than its carrying amount, resulting in an $18.6 million goodwill impairment charge in the fourth quarter of 2005.
We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets, including intangible assets, may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business. During 2005, we implemented a rebranding of all our business lines to a single brand - “BioScrip.” As a result of that strategy the value of the trade names associated with our Natural Living, Inc. and Vitality Home Infusion Services, Inc. subsidiaries has been eliminated, and these assets have been removed from the balance sheet. This resulted in a $5.8 million charge in the second quarter of 2005.
We account for employee stock and stock-based compensation plans through the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) and as such, generally recognize no compensation expense for employee stock options.
We adopted the fair-value-based method of accounting for share-based payments effective January 1, 2006. The impact of adoption of SFAS No. 123(R) is difficult to predict because it will depend on levels of share-based payments granted from and after January 1, 2006. As of the date of this Annual Report on Form 10-K, the impact of SFAS No. 123(R) in 2006 would be a reduction of approximately $1.2 million in net income and $0.03 earnings per share for known grants through the date of this report. We expect additional grants to be made during the remainder of 2006, the impact of which is not estimable at this time. Had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 of Notes to Consolidated Financial Statements.
The following unaudited condensed consolidated pro forma financial information for the years ended December 31, 2005, 2004 and 2003 has been prepared as if the Chronimed acquisition had been consummated at the beginning of each respective period, utilizing the purchase method of accounting, with pro forma adjustments for amortization of intangibles associated with the acquisition. The number of basic and diluted shares has also been adjusted assuming we exchanged each outstanding share of Chronimed common stock for 1.12 shares of our common stock. We believe this information to be helpful in gaining an understanding of future financial and operating results and trends. In the following Management’s Discussion and Analysis we provide discussion of both the reported results as set forth in the Financial Statements and the pro forma results as presented in the tables below.
Reflects estimated amortization expense as if Chronimed was acquired at the beginning of the year
Cost of Revenue and Gross Profit. Reported cost of revenue for the year ended December 31, 2005 was $957.0 million compared to $562.4 million for the same period in 2004. The total gross profit rate as a percentage of revenue was 10.8% for both 2005 and 2004. The Specialty Services segment gross profit rate decreased with the addition of the acquired Chronimed specialty business, which was at a lower gross profit rate. The PBM Services segment gross profit rate, which is lower than Specialty Services, increased in 2005 from 2004 due to improved generic utilization and favorable rate impact created from the loss of lower margin business in 2005.
Pro forma combined cost of revenue decreased $29.8 million, or 2.7%, to $1,058.1 million for the year ended December 31, 2005 from $1,087.9 million for the year ended December 31, 2004. The pro forma gross profit rate as a percentage of revenue increased to 10.9% for the year ended December 31, 2005 compared to 10.8% for the same period in 2004. The PBM services gross profit rate increase in 2005 discussed above was partially offset by a lower Specialty Services gross profit rate primarily due to higher infusion product costs and overall lower Specialty Services payor reimbursement rates.
result of the addition of Chronimed’s expenses starting March 12, 2005. The pro forma SG&A discussion below provides a more meaningful detail on year-over-year expense increases.
Goodwill and Intangible Impairment. The year ended December 31, 2005 includes the write off of $5.8 million for the trade name intangible assets associated with Natural Living, Inc. and Vitality Home Infusion Services, Inc. The re-branding of all of our business lines to a single brand, BioScrip, prompted the write off of the existing trade name intangible assets. Also included in 2005 are goodwill and intangible impairment charges of $19.4 million, principally associated with the PBM Services segment. The PBM Services impairment is the result of the loss of the Centene contract and other related PBM Services contracts, and its negative impact on the long term financial outlook for the PBM Services business.
Net Income and Earnings Per Share. We reported a net loss of $23.8 million, or $0.70 per diluted share, for the year ended December 31, 2005, compared to net income of $7.0 million, or $0.31 per diluted share, for the same period a year ago. The decline primarily is due to goodwill and intangible impairment charges and increased bad debt expense, as well as increased SG&A expenses, amortization expense and merger expenses related to the Chronimed acquisition. The number of average diluted shares at December 31, 2005 was 34,128,650 compared to 22,701,862 at December 31, 2004, due to the acquisition and the related issuance of stock.
On a pro forma combined basis, revenue for the year ended December 31, 2004 was $1,219.6 million compared to $1,075.9 million for the same period in 2003, a $143.6 million, or 13.4%, increase. The increase was concentrated in Specialty Services, with volume growth in both mail and community operations, including the acquisition of Natural Living, Inc. noted above.
Cost of Revenue and Gross Profit. Total reported cost of revenue increased 8.1% to $562.4 million from $520.2 million for the year ended December 31, 2003. This is commensurate with the increase in revenues experienced in 2004.
Total reported gross profit for the year ended December 31, 2004 was $68.2 million representing a gross profit percentage of 10.8%, compared to $68.5 million, or 11.6%, for the prior year. The reduction in the gross profit percentage reflects reimbursement pressures experienced in Specialty Services. Within Specialty Services we were adversely affected by pressures in our infusion business, both reimbursement pressure and cost of goods purchasing pressure.
Pro forma gross profit as a percentage of revenue decreased to 10.8% for the year ended December 31, 2004 compared to 11.8% for the same period in 2003. The decline in gross profit percentage reflects reimbursement pressure experienced in Chronimed’s specialty pharmacy business from 2003 to 2004, as well as in the infusion business as noted above.
Pro forma SG&A for the year ended December 31, 2004 was $101.7 million, or 8.3% of total revenue, compared to $95.1 million, or 8.8% of total revenue, for the year ended December 31, 2003. The spending increase is due to overall revenue volume growth.
Pro forma amortization expense for the year ended December 31, 2004 was $8.0 million compared to $6.8 million for the year ended December 31, 2003. The increase in 2004 was the result of increased amortization expense associated with the Natural Living, Inc. acquisition in February 2004.
Net Interest Expense. Net interest expense was $0.8 million for each of the years ended December 31, 2004 and 2003. The average daily borrowings were consistent for the years 2004 and 2003.
Pro forma net interest expense was $0.5 million for each of the years ended December 31, 2004 and 2003.
Net cash provided by financing activities in 2005 was $1.9 million compared to net cash provided by financing activities in 2004 of $7.3 million due to lower borrowings in 2005.
Our daily borrowings during 2005 were $744.4 million, of which $744.3 million was repaid during 2005. At the end of any given month during 2005 the line of credit balance did not exceed $14 million.
On October 7, 2005, we acquired Northland for $12.0 million in cash. Direct expenses associated with the acquisition were less than $0.1 million. The acquisition was paid for with proceeds from the Facility, as well as available cash on hand. As we continue to grow, we anticipate that our working capital needs will also continue to increase. Also, we intend to make substantial IT systems investments in 2006 to improve internal control and streamline our business processes. We believe that our cash on hand, together with funds available under the Facility and cash expected to be generated from operating activities will be sufficient to fund our anticipated working capital, IT systems investments and other cash needs for at least the next twelve months.
At December 31, 2005, we had Federal NOLs of approximately $14.0 million, which will begin expiring in 2017. Certain of the NOLs are subject to limitation and may be utilized in a future year upon release of the limitation. If the NOLs are not utilized in the year they are available they may be utilized in a future year to the extent they have not expired.
As of the end of the period covered by this Annual Report, evaluations of disclosure controls and internal control over financial reporting were performed under the supervision and with the participation of management, including our Chief Executive Office (“CEO”) and Chief Financial Officer (“CFO”). Based upon these evaluations, management believes our controls were not effective as of December 31, 2005. See Part II, Item 9A. “Controls and Procedures” for a full discussion of the Evaluation of Disclosure Controls and Procedures, Management Report on Internal Control over Financial Reporting and our Management Remediation Plan.
Exposure to market risk for changes in interest rates relates to our outstanding debt. At December 31, 2005 we did not have any long-term debt. We are exposed to interest rate risk primarily through our borrowing activities under our line of credit discussed in Item 7 of this report. A 10% increase in interest rates would not have a significant effect on our interest expense. Interest rate risk on our investments is immaterial due to our level of investment dollars. Foreign currency exchange rate risk, commodity price risk, or other market risks (e.g. equity price) are not present. We do not use financial instruments for trading or other speculative purposes and are not a party to any derivative financial instruments.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BioScrip, Inc. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of BioScrip, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 27, 2006, expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.
BioScrip, Inc. (the “Company”) is a specialty pharmacy services provider that distributes prescription drugs, coordinates customer benefits and provides specialized therapy management services for people with certain health conditions, particularly those treated with biotech injectable medications, as well as those afflicted with potentially life threatening or debilitating diseases or genetic disorders and requiring specialty medications. The Company works with patients, physicians and pharmaceutical manufacturers. The Company also works directly with a variety of health insurers, including HMO’s, indemnity plans and PPO’s, managed care organizations, other insurance companies, and, to a lesser extent, labor unions, self-funded employer groups, government agencies (including Medicaid and Medicare) and other self-funded plan sponsors, as well as through third-party administrators. The Company works with all of these constituents in a concerted effort to improve clinical and economic outcomes while enhancing the quality of life for the individuals living with chronic conditions.
Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. The procedure for estimating the allowance for doubtful accounts requires significant judgment and assumptions. The risk of collection varies based upon the product, the payor (commercial health insurance, government, physician), the patient’s ability to pay the amounts not reimbursed by the payor and point of distribution (retail, national mail). The Company estimates the allowance for doubtful accounts based upon a variety of factors including the age of the outstanding receivables and the historical experience of collections, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The Company periodically reviews the estimation process and makes changes to the estimates as necessary. In the fourth quarter of 2005 the Company recorded a $7.1 million charge to reflect an increase in the allowance for doubtful accounts receivable resulting from lower than expected collections during the Chronimed merger integration period.
regulations and contract negotiations occur frequently, necessitating the continual review and assessment of the estimation process.
Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventory consists principally of purchased prescription drugs for the Company’s traditional mail and specialty distribution operations. Included in inventory is a reserve for expired inventory.
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:
Payables to plan sponsors represent the sharing of manufacturer’s rebates with the plan sponsors and, on a limited basis, profit sharing plans with certain contracts, primarily in the PBM Services segment.
Cost of revenue includes pharmacy claims, fees paid to pharmacies, shipping and other direct and indirect costs associated with pharmacy management, claims processing operations and mail order services, offset by volume and prompt pay discounts received from pharmaceutical manufacturers and distributors and total manufacturer rebates.
Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business. During 2005, the Company implemented a rebranding of all its business lines to a single brand - “BioScrip”. As a result of that strategy the value of the trade names associated with the Company’s Natural Living, Inc. and Vitality Home Infusion Services, Inc. subsidiaries has been written off. This resulted in a $5.8 million charge in the second quarter of 2005.
In the fourth quarter of 2005, as part of the Company’s annual goodwill impairment testing, it determined that intangible assets associated with certain customer lists were no longer recoverable from future cash flows. This resulted in an $0.8 million intangible impairment charge in fourth quarter 2005.
The Company’s financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and its line of credit. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and line of credit approximate fair value due to their fully liquid or short-term nature. The outstanding balance on the line of credit at December 31, 2005 was $7.4 million.
The accounting policies applied to the business segments are the same as those described in the Summary of Significant Accounting Policies. The 2005 information below includes Chronimed beginning March, 2005 and Northland beginning October, 2005. See Note 4 of Notes to Consolidated Financial Statements.
The purchase price paid for Chronimed resulted in the fair value of assets acquired being in excess of the net asset value of the business including both tangible assets and separately identifiable intangible assets. Goodwill, described in SFAS 141, Paragraph 43 as “the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed,” was recognized and was consistent with the rationale for the acquisition as follows:
On March 1, 2006 the Company acquired all of the issued and outstanding stock of Intravenous Therapy Services, Inc. (“ITS”), a specialty home infusion company located in Burbank, California for approximately $13 million in cash, plus a potential earn-out payment contingent on achieving certain future performance benchmarks. The addition of ITS enhances the Company’s ability to service infusion patients on both the East and West coasts and complements its strategic objective of expanding its infusion operations nationally.
The Eufaula litigation and Serono investigation are in the early stages of their proceedings and, as such, the Company is currently unable to assess the probable outcomes of these proceedings or their respective financial impact. If either or both of these matters were resolved adversely to the Company, either could have a material adverse effect on the Company.
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, results of operations and cash flows. Violation of the Federal anti-kickback statute, for example, may result in substantial criminal penalties, as well as suspension or exclusion from the Medicare and Medicaid 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, results of operations and cash flows.
The Company leases its facilities and certain equipment under various operating leases with third parties. Facility lease terms are generally five years, the majority containing options to extend for periods ranging from one to five years. Approximately 45% of these leases contain escalation clauses that increase base rent payments based upon either the Consumer Price Index or an agreed upon schedule. New or renegotiated leases may contain periods of free rent, or rent holidays, ranging from one to six months. Equipment leases are generally for periods of three to five years. The future minimum lease payments under these operating leases at December 31 are as follows (in thousands):
The Company’s Federal and state income tax (benefit) provision is summarized in the following table (in thousands):
The effect of temporary differences that give rise to a significant portion of deferred taxes is as follows as of December 31 (in thousands):
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 5,750,000 shares are authorized for issuance. As of December 31, 2005, there remain 2,974,630 shares available for grant under the Plans.
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 align more closely the interests of such directors with those of
A summary of quarterly financial information for fiscal 2005 and 2004 is as follows (in thousands):
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Management assessed our internal control over financial reporting as of December 31, 2005, the end of our fiscal year. Management based its assessment on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or “COSO”. Management’s assessment included an evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
Inadequate control over segregation of duties, and restriction of employee access to application modules within the Company’s financial and operating systems, including our general ledger system;
Lack of monitoring controls over personnel in the information technology function with access to the production databases supporting the general ledger financial data; and
Ineffective controls over the documentation, approval, testing and migration of system changes to production environments.
In the area of revenue recognition, we identified an ineffective control which we believe constitutes a material weakness:
Inadequate system and manual controls to prevent the potential overstatement of revenue for cancelled orders and other non-standard transactions in our community pharmacies. Controls failed to detect necessary revenue adjustments that were more than inconsequential but not material. Furthermore, the failure of our controls could potentially result in revenue adjustments of a material amount.
The need for an improved process to quantify and document the Company’s estimates for uncollectible accounts receivable.
This material weakness affects the ability to monitor collections of accounts receivable, develop appropriate estimates of uncollectible amounts and to report accounts receivable in the financial statements at net realizable value and resulted in a material adjustment in the fourth quarter.
As a result of the material weaknesses described in the preceding paragraphs, our management believes that as of December 31, 2005, our internal control over financial reporting was not effective based on the COSO criteria.
Given the material weaknesses, management performed additional analysis and procedures to ensure that our consolidated financial statements are presented fairly in conformity with generally accepted accounting principles. Accordingly, management believes that the consolidated financial statements and schedules included in this Form 10-K herein fairly present in all material respects our financial position, results of
With respect to our remediation plans, we believe that the actions noted below in information technology and finance will remedy our material weaknesses.
Segregation of duties - We are in the process of examining each of our operating and financial systems, including the general ledger system, and will restrict access of those modules and fields to employees requiring access in order to perform their jobs with appropriate internal control. We have identified the necessary segregation of duties changes and intend to implement them in second quarter 2006. We will be implementing other changes across our pharmacy operating systems during 2006.
As of December 31, 2005, we had multiple community pharmacy systems - each with a unique pharmacy dispensing, revenue transaction and receivables process. In 2006, we intend to consolidate to one community pharmacy platform. We believe that the consolidation of systems in our community pharmacies will improve our control environment and reduce the likelihood of revenue adjustments.
We have added resources to prevent delays in cash posting. We assigned new leadership to manage the cash posting process. We have already implemented new processes to improve timeliness and accountability. We are expanding our use of automated tools to post cash, improving both speed and accuracy.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that BioScrip, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, because of the effect of: (i) ineffective information technology controls, (ii) ineffective controls over revenue recognition, and (iii) ineffective controls over collecting and reserving for uncollectible accounts receivable, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
(1) In the area of information technology, the Company identified the following ineffective controls which it believes constitute a material weakness in the aggregate:
b. Lack of monitoring controls over personnel in the information technology function with access to the production databases supporting the general ledger financial data.
(2) In the area of revenue recognition, the Company identified ineffective controls which it believes constitute a material weakness:
(3) In the area of accounts receivable, the Company identified the following ineffective controls which it believes constitute a material weakness in the aggregate:
a. Ineffective processes and controls to ensure timely application of customer payments to customer accounts receivable.
c. The lack of a thorough and objective process to quantify and document the Company’s estimates for uncollectible accounts receivable.
The information required by this item is incorporated by reference from the information contained in our definitive proxy statement to be filed with the SEC on or before April 30, 2006 in connection with our 2006 Annual Meeting of Stockholders.
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2005, 2004 and 2003
Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003
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
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
Lease Amendment and Extension Agreement between Mutual Properties Stonedale L.P. and MIM Corporation dated December 10, 1997
Lease Agreement between Mutual Properties Stonedale L.P. and Pro-Mark Holdings, Inc., dated December 23, 1997
Amendment No. 1 to Employment Agreement, dated as of October 11, 1999 between MIM Corporation and Richard H. Friedman
Lease Agreement, dated as of February 24, 2000, by and between American Duke-Weeks Realty Limited Partnership and Continental Managed Pharmacy Services, Inc.
First Lease Amendment, dated as of February 24, 2000, by and between Duke-Weeks Realty Limited Partnership and Continental Managed Pharmacy Services, Inc.
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)
Purchase Agreement, dated as of January 9, 2002, among Vitality Home Infusion Services, Inc., Marc Wiener, Barbara Kammerer and MIM Corporation
Guaranty of Lease Agreement, dated January 31, 2002, made by the Company in favor of Bar-Marc Realty, LLC
Amendment to Employment Agreement entered into as of September 18, 2002 by and between the Company and Barry A. Posner
Third Amendment of Agreement of Lease, dated June 24, 2002, between Five Regent Park Associates and American Disease Management Associates
Second Amendment and Consent, dated as of January 31, 2002, to the Receivable Purchase and Transfer Agreement, dated as of November 1, 2000
Amended and Restated Rights Agreement, dated as of December 3, 2002 between MIM Corporation and American Stock Transfer and Trust Company
Extension Agreement, dated as of June 30, 2003, to the Loan and Security Agreement dated as of November 1, 2000, between MIM Funding LLC and HFG Healthco-4 LLC
Amendment, dated January 28, 2004, to Employment Agreement, dated as of March 1, 1999, as amended to date, by and between MIM Corporation and Barry A. Posner
Amendment, dated October 13, 2003, to Employment Letter Agreement entered into as of June 19, 2001, by and between Scrip Solutions, Inc. and Michael J. Sicilian
Amendment No. 3 to Employment Agreement, dated as of August 9, 2004, between MIM Corporation and Richard H. Friedman
Amendment, dated October 28, 2004, to Employment Agreement for Barry A. Posner
Employment Offer Letter, dated July 18, 2005 from the Company to Anthony J. Zappa
Amendment No. 2, dated July 18, 2005, to Change of Control Severance Agreement of Anthony J. Zappa
Certification of Gregory H. Keane pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on August 9, 2004
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on January 5, 2005
Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 15, 2003.
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.
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.
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.
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.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on August 10, 2000.
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.
Incorporated by reference to the indicated exhibit to the Company’s Form 8-K filed on February 5, 2002.
Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
Incorporated by reference to the indicated exhibit to the Company’s Annual Report Form 10-K for the year ended December 31, 2002.
Incorporated by reference from the Company’s definitive proxy statement for its 2002 annual meeting of stockholders filed with the Commission April 24, 2002.
Incorporated by reference from the Company’s definitive proxy statement for its 2003 annual meeting of stockholders filed with the Commission April 30, 2003.
Incorporated by reference to Exhibit 4.1 to Post-Effective Amendment No. 3 to the Company’s Form 8-A/ A dated December 4, 2002.
Incorporated by reference to the indicated exhibit to the Company’s Annual Report Form 10-K for the year ended December 31, 2003.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on December 1, 2004
Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004
Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on June 6, 2005
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on March 2, 2006
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on March 1, 2006
Certification of Henry F. Blissenbach pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Henry F. Blissenbach pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. On March 12, 2005 the Company acquired all the issued and outstanding capital stock of Chronimed Inc. On October 7, 2005 the Company acquired all of the issued and outstanding stock of JPD, Inc. d/b/a Northland Medical Pharmacy. Both acquisitions have been consolidated since the date of purchase. All significant intercompany accounts and transactions have been eliminated in consolidation.
some instances, rebate payments are shared with the Company’s managed care organizations. Shared rebates are recorded as a reduction of revenue. Total rebates are recorded as a reduction of cost of goods sold.
Fee-For-Service Agreements. Fee-for-service agreements include: (i) specialty and mail service agreements, where the Company dispenses prescription medications through its own pharmacy facilities and (ii) PBM agreements, where prescription medications are dispensed through pharmacies participating in the Company’s retail pharmacy network as well as the Company’s mail service facility. Under fee-for-service agreements, revenue is recognized either: (a) when the pharmacy services are reported to the Company through the point of sale (“POS”) claims processing system and the drug is dispensed to the Member, in the case of a prescription filled through a pharmacy participating in the Company’s retail pharmacy network, or (b) at the time the drug is dispensed to the patient, in the case of a prescription filled through a pharmacy owned by the Company. Fee-for-service agreements accounted for more than 95% of revenue for each of the years ended December 31, 2005, 2004 and 2003.
Co-payments. When prescriptions are filled in a Company owned pharmacy, the Company collects and retains co-payments from plan sponsors’ members and records these receipts as revenue when the amounts are collected or deemed collectible and reasonably estimable. When prescriptions are filled through pharmacies participating in the Company’s retail pharmacy networks, the Company is not entitled to retain co-payments and accordingly does not account for retail pharmacy co-payments in its financial statements. Pharmacy network co-payments are never billed or collected by the Company and the Company has no legal right or obligation to receive them as they are collected by its network pharmacies.
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets, including intangible assets, may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis.
The Company’s compensation cost for stock option plans for employees and directors, had it been determined in accordance with the fair value method prescribed by SFAS No. 123, would have been as follows for the years ended December 31 (in thousands except per share data):
The following table outlines, by segment, contracts with Plan Sponsors having revenues that individually exceeded 10% of the Company’s total revenues (in thousands):
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Standard No. 141, Business Combinations, (“SFAS 141”) and Statement of Financial Standard No. 142, Goodwill and Other Intangible Assets, (“SFAS 142”) which establish accounting and reporting standards governing business combinations, goodwill and intangible assets. SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS 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. Management assesses impairment in the fourth quarter of each year. 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 leased 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 former officer and director of the Company (the “Founder”). Rent expense was approximately $0.1 million for each of the years ended December 31, 2005, 2004, and 2003. With the relocation of the Company’s business headquarters to Eden Prairie, Minnesota, a lease buy-out was effected at December 29, 2005 for approximately $0.2 million.
On November 1, 2000 the Company entered into a $45 million revolving credit facility (the “Facility”) with an affiliate of Healthcare Finance Group, Inc. (“HFG”). The Facility had a three-year term, was secured by the Company’s receivables with interest paid monthly, and provided for borrowing up to $45,000 at the London Inter-Bank Offered Rate (LIBOR) plus 2.1%. The facility contained various covenants that, among other things, required the Company to maintain certain financial ratios, as defined in the agreements governing the Facility.
On February 27, 2003, the Executive Committee of the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to an aggregate of $10.0 million of its Common Stock in open market or private transactions. Through December 31, 2005, the Company has repurchased 799,893 shares of its Common Stock in the open market at an aggregate purchase price of $5.1 million, pursuant to this plan.
Robert Unger, a shareholder of Chronimed, Inc., filed a purported class action lawsuit in the state court of Minnesota, Hennepin County, on August 16, 2004, naming Chronimed Inc, and certain of its officers and directors as defendants. He amended his complaint on December 10, 2004, to add an additional plaintiff and BioScrip, Inc, (under the name MIM Corporation) as an additional defendant. The amended complaint asserts claims against the Chronimed officer and director defendants, who are represented by other law firms, for alleged breach of their fiduciary duties in connection with the merger agreement by which the Company acquired Chronimed in March 2005 and alleges that the Company aided those alleged breaches. The amended complaint seeks rescission of the merger and other relief. The amended complaint was never served on the Company, which has not responded to the pleading, appeared in the lawsuit, or been involved in any proceedings in the case. The court dismissed the amended complaint as against the Chronimed officer and director defendants and denied the plaintiffs’ motion to reinstate it.
Rent expense for non-related party leased facilities and equipment was approximately $4.3 million, $1.5 million and $1.6 million for the years ended December 31, 2005, 2004 and 2003, respectively. Rent expense for related party leased facilities was approximately $0.1 million for each of the years ended December 31, 2005, 2004 and 2003. All related party leases have been terminated as of January 31, 2006.
At December 31, 2005, the Company had Federal and state NOLs remaining of approximately $14.0 million, the majority of which will begin expiring in 2017. At December 31, 2005 the capital loss carryforward of $2.3 million was not expected to be utilized before expiring in 2006. Due to the uncertainty of utilizing this item, a valuation allowance has been established for the full amount.
On March 12, 2005 the Company assumed all the option plans from Chronimed, Inc. as part of the acquisition. The plans assumed were the 1994 Stock Option Plan, the 1997 Stock Plan, the 1999 Stock Plan, the 2001 Incentive Stock Plan and the 1994 Stock Option Plan for Directors. Previously granted Chronimed options assumed by the Company in 2005 totaled 2,612,146. As of December 31, 2005, there remain 193,342 shares available for grant under these Plans. Vesting on the Chronimed options was accelerated to be fully vested at the date of acquisition.
Under the Plans, the Company’s Board of Directors may grant performance units to key employees. The Company’s Board of Directors establishes the terms and conditions of the performance units including the performance goals, the performance period and the value for each performance unit. 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 $1.0 million in respect of performance units for any given year. There were no performance units granted for any period presented. As of December 31, 2005, there were no performance units outstanding.
Plan Sponsor (B) revenue and accounts receivable is primarily in the PBM Services segment with a lesser amount in the Specialty Services segment
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 50% of their salary, subject to Internal Revenue Service limits. The Company may make a discretionary matching contribution. The Company recorded matching contributions in selling, general and administrative expenses of $0.2 million in each of the years ended December 31, 2005, 2004, and 2003, respectively.
The Company acquired Chronimed in March 2005, and Northland in October 2005.
The Company acquired Natural Living, Inc. dba Fair Pharmacy in February, 2004.