The selected consolidated financial data presented below should be read in conjunction with, and is qualified in its entirety by reference to, Management’s Discussion and Analysis and our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Report. The 2005 information below includes Chronimed beginning March, 2005 and Northland beginning October, 2005. The 2006 information below includes Burbank beginning March 1, 2006. See Note 4 of Notes to Consolidated Financial Statements.
Reflects merger, integration and re-branding expenses related to the acquisition of Chronimed on March 12, 2005.
Includes a $4.0 million charge, net of tax, related to write-off of trade names due to our rebranding strategy in the Specialty Services segment, and an $18.2 million charge, net of tax, related to goodwill impairment in the PBM Services segment.
“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995
We provide comprehensive specialty pharmaceutical and pharmacy benefit management (“PBM”) services. Our specialty pharmaceutical services (“Specialty Services”) include the comprehensive support, management, dispensing, distribution and data reporting for medications used to treat patients living with chronic health conditions and are provided in various capacities to patients, physicians, payors and pharmaceutical manufacturers. Our PBM services include pharmacy network management, claims processing, benefit design, drug utilization review, formulary management and traditional mail order pharmacy fulfillment.
Specialty Services and PBM Services revenues are derived from our relationships with patients, physicians, pharmaceutical manufacturers and a variety of third party payors, including managed care organizations, as well as third party administrator (“TPAs”), self-funded employer groups and government programs (collectively “Plan Sponsors”).
Our PBM Services are offered to Plan Sponsors and are designed to promote a broad range of cost-effective, clinically appropriate pharmacy benefit management services through our network of retail pharmacies and our traditional mail service distribution facility. Over the past several years we have focused on building our Specialty Services for strategic growth, and have lost a significant amount of PBM Services business, including the loss of our contracts with Centene Corporation and excelleRx. Consequently, Specialty Services revenues represent 75% of our total revenue.
We plan to grow our infusion business by marketing a broader product offering in our current geographic service area. This includes adding new therapies to our current focus on immunological blood products, including our most recent focus on patients with hemophilia. We will work with physicians who utilize our services to support their in-office infusion activities and we expect to establish ambulatory infusion centers.
The following discussion is not intended to be a comprehensive list of all the accounting estimates or judgments made in the preparation of our financial statements, and in many cases the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in its application. See our audited consolidated financial statements and notes thereto which appear in Item 8 - Financial Statements and Supplementary Data of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by GAAP.
We generate revenue principally through the sale of prescription drugs, which are dispensed either through a pharmacy participating in our pharmacy network or a pharmacy owned by us. Revenue is generally derived under fee-for-service agreements; however, an immaterial amount of revenue is derived from capitated agreements. Prescription drug revenue is offset by the rebates shared with Plan Sponsors.
Fee-For-Service Agreements. Fee-for-service agreements include: (i) specialty and mail service agreements, where we dispense prescription medications through our pharmacy facilities and (ii) PBM agreements, where prescription medications are dispensed through pharmacies participating in our retail pharmacy network as well as through our traditional mail service facility. Under fee-for-service agreements, revenue is recognized either: (a) when the pharmacy services are reported to us 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 our retail pharmacy network, or (b) at the time the drug is dispensed, in the case of a prescription filled through a pharmacy owned by us. Fee-for-service agreements accounted for more than 95% of our revenue for each of the years ended December 31, 2006, 2005 and 2004.
Co-Payments; Co-Insurance. When prescriptions are filled by our own pharmacies (that is, where we are acting as a participating pharmacy in another PBM’s or payor’s pharmacy network), we collect and retain co-payments or co-insurance from Plan Sponsors’ members and record these receipts as revenue when the amounts are collected or deemed collectible and reasonably estimable. Conversely, when prescriptions are filled through pharmacies participating in our retail pharmacy networks, we are not entitled to retain co-payments or co-insurance and accordingly do not recognize revenue with respect to or account for retail pharmacy co-payments or co-insurance in our financial statements. In our capacity as a PBM, pharmacy network co-payments and co-insurance are never
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. 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. When it is deemed probable that a customer account is uncollectible, that balance is written off against the existing allowance.
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 it is more likely than not that we will not be able to realize the benefit from the deferred tax assets. Deferred tax assets are classified as current or non current according to the character of the asset or liability to which they relate.
In addition, we have established, and periodically review and reevaluate, an estimated income tax reserve. This income tax reserve is for exposures related to various Federal and state tax matters. An accrual is 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.
In accordance with SFAS 142, Goodwill and Other Intangible Assets, 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.
The Company has two reporting units - Specialty Services and PBM Services. In the fourth quarter of 2005 the fair value of the PBM Services segment was less than its carrying amount, resulting in the write off of all goodwill associated with PBM Services. Specialty Services was evaluated during fourth quarter 2006, and no impairment existed at December 31, 2006.
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS 123(R)”), using the modified-prospective-transition method. Under that transition method, compensation cost recognized during 2006 includes: (i) compensation cost for all share-based payments granted prior to, but not yet vested as of, January 1, 2006 based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (ii) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.
We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes. As of December 31, 2006, we are not involved in any unconsolidated special purpose entities or variable interest entities.
Revenue. Total reported revenue for the year ended December 31, 2006 increased $79.2 million, or 7.4%, to $1,152.4 million from $1,073.2 million for the same period in 2005. The 2005 results reflect the acquisition of Chronimed starting March 12, 2005. The year-over-year increase was concentrated in the Specialty Services segment and is primarily attributable to sales of new drugs, strong growth in infused products, new business related to the CAP program and the acquisitions of JPD, Inc d/b/a Northland Medical Pharmacy (“Northland”) in October 2005 and Intravenous Therapy Services, Inc. (“Burbank”) in March 2006. The increase is partially offset by the loss of PBM contracts.
Revenue for the year ended December 31, 2006 was $1,152.4 million compared to $1,187.3 million on a pro forma basis for the year ended December 31, 2005, a $34.9 million, or 2.9%, decrease. The discussion below explains the primary reasons for revenue changes in each of our segments, Specialty Services and PBM Services.
Specialty Services revenue for the year ended December 31, 2006 was $866.6 million compared to $802.6 million on a pro forma basis for the same period a year ago, a $64.0 million, or 8.0% increase. This increase was due primarily to sales of new specialty drugs under exclusive or preferred distribution arrangements, strong growth in infusion products, new business related to the CAP program, and the acquisition of Northland in October 2005 and Burbank in March 2006.
Cost of Revenue and Gross Profit. Reported cost of revenue for the year ended December 31, 2006 was $1,032.9 million compared to $957.0 million for the same period in 2005. The total gross profit rate as a percentage of revenue for the year ended December 31, 2006 was 10.4%, compared to 10.8% for the same period in 2005. The Specialty Services segment gross profit rate decreased primarily as a result of program changes associated with the implementation of Medicare Part D on January 1, 2006, and industry-wide reimbursement pressures. The PBM Services segment gross profit rate, which is lower than Specialty Services, increased in 2006 from 2005 due to improved generic utilization and favorable rate impact created from the loss of lower margin business in 2006, partially offset by a rate change by a large traditional mail services client.
Combined cost of revenue decreased $25.2 million, or 2.4%, to $1,032.9 million for the year ended December 31, 2006 from $1,058.1 million on a pro forma basis for the year ended December 31, 2005. Gross profit rate as a percentage of revenue decreased to 10.4% for the year ended December 31, 2006 compared to 10.9% on a pro forma basis for the same period in 2005. The Specialty Services gross profit decrease in 2006 was primarily the result of program changes associated with the implementation of Medicare Part D on January 1, 2006, and industry-wide reimbursement pressures. This was partially offset by an increase in PBM services gross profit rate in 2006 due to improved generic utilization and favorable rate impact created from the loss of lower margin business in 2006 partially offset by a rate change by a large traditional mail services client.
We continue to experience downward reimbursement pressure in both our Specialty Services and PBM Services segments as healthcare costs receive increasing scrutiny at local and national levels. In addition, the healthcare services industry continues to consolidate, creating larger and more aggressive competitors. In particular, we are beginning to see some of our competitors attempt to lock us out of certain specialty pharmacy contracts where we have been a provider in the past, which could cause a reduction in our revenue.
9.0% of total revenue, for the same period a year ago. The 2005 results reflect the acquisition of Chronimed starting March 12, 2005. The year-over-year increase in SG&A is primarily the result of additional ongoing operating expenses associated with acquisitions made since September 30, 2005, stock option expense due to the adoption of SFAS 123(R) at January 1, 2006, operating expense increases related to the CAP program, and severance expense related to staffing reductions. These expense increases were partially offset by a reduction in spending.
Merger Related Expenses. There were merger related expenses of $0.1 million in 2006. For the year ended December 31, 2005 merger related expenses were $4.6 million. The integration and other merger-related expenses include expenses incurred to consolidate the acquisition of Chronimed, including severance and rebranding costs.
Net Interest Expense. Net interest expense was $3.0 million for the year ended December 31, 2006 compared to $0.4 million for the year ended December 31, 2005. Interest expense associated with our line of credit was higher in 2006 as our average borrowing levels were higher. The increase is principally the result of additional borrowings used to fund the acquisition of Burbank, operating losses, declining PBM revenue and increased working capital needs associated with the CAP program. Interest expense for the line of credit was partially offset by interest income received on short term investments and money market accounts.
Net Income and Earnings Per Share. We reported a net loss of $38.3 million, or $1.03 per share, for the year ended December 31, 2006, compared to a net loss of $23.8 million, or $0.70 per share, for the same period a year ago. The increase in net loss is due primarily to a $25.7 million income tax charge to establish a valuation allowance against deferred tax assets. The number of weighted average basic and diluted shares at December 31, 2006 was 37,303,531 compared to 34,128,650 at December 31, 2005, due to the acquisition and the related issuance of stock.
Net loss for the year ended December 31, 2006 was $38.3 million, or $1.03 per diluted share, compared to pro forma net loss of $24.9 million, or $0.73 per diluted share, for the year ended December 31, 2005.
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.
Selling, General and Administrative Expenses. For the year ended December 31, 2005, Selling, General and Administrative expenses (“SG&A”) increased to $96.5 million, or 9.0% of total revenue, from $50.9 million, or 8.1% of total revenue, for the same period a year ago. This increase in SG&A is primarily the 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.
Pro forma SG&A for the year ended December 31, 2005 was $107.0 million, or 9.0% of total revenue, compared to $101.7 million, or 8.3% of total revenue, for the year ended December 31, 2004. The increase in SG&A primarily is due to increased sales and marketing costs to support BioScrip’s expanded sales force and community focused business strategy, and increased costs for compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002. The higher level of SG&A spending does not fully reflect merger related cost savings to be realized in 2006 by the elimination of duplicate functions, locations and other costs associated with the integration in the second half of 2005.
Bad Debt Expense. For the year ended December 31, 2005 we recorded bad debt expense of $12.8 million, an increase of $10.9 million compared to $1.9 million in 2004. The increase is the result of increased accounts receivable due to the Chronimed merger and a $7.1 million fourth quarter charge to reflect an increase in the allowance for doubtful accounts receivable created by lower than expected collections during the Chronimed merger integration period. We have added resources and are enhancing collection processes to improve 2006 financial performance. While we believe our efforts will improve collections performance, there can be no assurance that it will improve in 2006 and our results could be adversely impacted. See Item 1A. “Risk Factors” for additional information regarding billing and collecting risks.
Pro forma bad debt expense for the year ended December 31, 2005 was $13.7 million compared to $6.1 million in 2004, an increase of $7.6 million. The increase is due to the fourth quarter charge of $7.1 million to reflect an increase in the allowance for doubtful accounts receivable created by lower than expected collections during the Chronimed merger integration period.
Merger Related Expenses. The year ended December 31, 2005 includes merger related expenses of $4.6 million. There were no merger related expenses in 2004. The merger related expenses include expenses incurred to consolidate the acquisition of Chronimed during 2005, including expenses incurred to consolidate to one brand, BioScrip, in the marketplace.
Pro forma merger related expenses were $6.6 million and $0 for the years ended December 31, 2005 and 2004, respectively, and reflect $2.0 million of merger related expenses incurred by Chronimed from January 1, 2005 to March 12, 2005, the date of the Chronimed acquisition, in addition to those discussed above.
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 rebranding 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 Interest Expense. Net interest expense was $0.4 million for the year ended December 31, 2005 compared to $0.8 million for the year ended December 31, 2004. Interest expense associated with our line of credit was lower in 2005 as our average borrowing levels were lower. Interest expense was further offset by interest income received on overnight investments of excess cash and the receipt of interest on a past due receivable.
Pro forma net interest expense was $0.3 million for the year ended December 31, 2005 compared to $0.5 million for the year ended December 31, 2004.
Benefit from and Provision for Income Taxes. The reported benefit from income taxes was $5.7 million for 2005 compared to a reported provision for income taxes of $4.5 million for 2004. The effective tax rate was 19.4% in 2005 compared to 38.8% in 2004. The 2005 tax rate was impacted by permanent differences created by specific write-offs of intangibles of $17.4 million, which had no tax basis, and other non-deductible items. At December 31, 2005, we had Federal net operating loss carryforwards (“NOLs”) of $14.0 million which begin expiring in 2017.
Net (Loss) Income and (Loss) 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.
For 2006, net cash used in operating activities totaled $29.9 million compared to $6.4 million used in operating activities for 2005. The increase in operating cash used from 2005 to 2006 was the result of increases in accounts
Net cash used in investing activities in 2006 was $18.4 million compared to net cash provided by investing activities of $3.1 million in 2005. The change was driven primarily by the March 1, 2006, acquisition of Burbank for $13.1 million in cash and purchases of property and equipment for $5.4 million.
Net cash provided by financing activities in 2006 was $46.8 million compared to net cash provided by financing activities in 2005 of $1.9 million due to increased borrowings in 2006.
The weighted average interest rate on the line of credit was 7.61% during 2006 compared to 5.77% for 2005. At March 9, 2007 we had $17.8 million of credit available under the Facility.
On March 1, 2006, we acquired Burbank for $13.1 million in cash. Direct expenses associated with the acquisition were less than $0.1 million. That acquisition was paid for with proceeds from the Facility. As we continue to grow, we anticipate that our working capital needs will also continue to increase. We intend to make substantial information technology (“IT”) systems investments beginning in 2007 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. Growth in the CAP program may require an increase in our line of credit to fund additional working capital requirements.
At December 31, 2006, we had Federal NOL carryforwards of approximately $21.6 million, which will begin expiring in 2017 and later. Certain of the NOL carryforwards are subject to limitation and may be utilized in a future year. If the NOL carryforwards are not utilized in the year they are available they may be utilized in a future year.
On February 28, 2003 we announced a stock repurchase program pursuant to which we are authorized to purchase up to $10 million of our common stock from time to time by various means. Our stock repurchase
The following table sets forth our contractual obligations affecting cash in the future:
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, 2006 and 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.
Because management does not believe that our exposure to interest rate market risk is material at this time, we have not developed or implemented a strategy to manage this market risk through the use of derivative financial instruments or otherwise. We will assess the significance of interest rate market risk from time to time and will develop and implement strategies to manage that market risk as appropriate.
We have audited the accompanying consolidated balance sheets of BioScrip, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(A). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
The Company’s consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
Certain prior period amounts have been reclassified to conform to the current year presentation. Such reclassifications had no material effect on the Company’s previously reported consolidated financial position, results of operations or cash flows.
Cash and cash equivalents are carried at cost, which approximates fair market value, and include demand deposits, overnight investments and money market accounts, with original maturities of ninety days or less when purchased.
Receivables include amounts due from certain third party payors and patient co-payments for pharmacies owned by the Company, amounts due from plan sponsors under the Company’s PBM agreements, amounts due from pharmaceutical manufacturers for rebates, and service fees resulting from the distribution of certain drugs through retail pharmacies.
Manufacturers’ rebates are primarily part of the Company’s 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 the Company’s 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 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.
Revenue is generally derived under fee-for-service agreements; however an immaterial number of capitated agreements exist. Prescription drug revenue is offset by the rebates shared with plan sponsors.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. FIN 48 requires that realization of an uncertain income tax position must be “more likely than not” (greater than 50 percent likely) before it can be recognized in the financial statements. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for the Company’s fiscal year beginning January 1, 2007. The Company is currently reviewing the effect FIN 48 will have on its financial statements.
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. The 2006 information below includes Intravenous Therapy Services, Inc. beginning March 1, 2006.
the opportunity to sell the Company’s products through Chronimed’s existing retail pharmacies;
The following table sets forth the allocation of the purchase price as of December 31, 2005:
As part of the merger, the Company consolidated Chronimed’s Minnetonka, Minnesota mail service operations into the Company’s higher capacity mail distribution operation in Columbus, Ohio and closed the Minnetonka mail facility. Severance costs of $1.0 million were included in the purchase price and were paid out by December 31, 2005.
On March 1, 2006 the Company acquired all of the issued and outstanding stock of Intravenous Therapy Services, Inc. (“Burbank”), a specialty home infusion company located in Burbank, California for approximately $13.1 million in cash, plus a potential earn-out payment contingent on achieving certain future performance benchmarks. The addition of Burbank 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 operating results of each of these acquisitions are included in the Company’s consolidated statement of operations from the date of each acquisition. Pro forma results of operations for the Natural Living, Inc., Northland and Burbank acquisitions have not been presented since the effects of these business acquisitions were not material to the Company’s financial performance either individually or in the aggregate.
The following table provides a reconciliation of goodwill by segment (in thousands):
The Facility was increased in July 2006 to provide for borrowings up to $75 million at LIBOR plus the applicable margin. Effective September 30, 2006, the Company extended the Facility with HFG through November 1, 2010. The Facility permits the Company to request an increase in the amount available for borrowing to up to $100 million, as well as to convert a portion of any outstanding borrowings from a Revolving Loan into a Term Loan. The borrowing base utilizes receivables balances and other related collateral as security under the Facility.
On February 14, 2005, a complaint was filed in the Alabama Circuit Court for Barbour County, captioned Eufaula Drugs, Inc. v. ScriptSolutions [sic], one of approximately fourteen substantially identical complaints commenced in Alabama courts against various unrelated pharmacy benefit management companies. On April 8, 2005, the plaintiff filed an amended complaint substituting the Company’s, BioScrip PBM Services f/k/a ScripSolutions (“PBM Services”) subsidiary as the defendant, alleging breach of contract and related tort and equitable claims on behalf of a putative nationwide class of pharmacies alleging insufficient reimbursement for prescriptions dispensed, principally on the theory that PBM Services was obligated to update its prescription pricing files on a daily rather than weekly basis. The complaint seeks unspecified money damages and injunctive relief. PBM Services sought unsuccessfully to remove the action to federal court. On February 5, 2007, the court denied PBM Services’ motion to dismiss the action for lack of jurisdiction and failure to state a claim, and on February 16, 2007, PBM Services answered the complaint denying the material allegations. The parties are now engaged in discovery into the question of class certification only. BioScrip intends to deny the allegations and intends to defend vigorously against the action.
BioScrip and its Chronimed, Inc. subsidiary were named as defendants in a qui tam lawsuit captioned Knight and Burns v. BioScrip, et. al., Civil Action No. 05-CV-00875 brought by two individual relators on behalf of the federal government and state of California in the United States District Court for the Southern District of California. The action was originally filed in April 2005 and an amended complaint was filed in December 2005. The defendants were not aware of the lawsuit until January 2007 when the federal government filed a notice declining to intervene in the action and the court unsealed the complaint and amended complaint and authorized the relators to proceed with the action. The amended complaint alleges that BioScrip’s pharmacies submitted fraudulent claims for reimbursement by Medicare and MediCal of pharmaceutical products from the late 1990’s until the date of the complaint and seeks damages in an unspecified amount, statutory penalties, and payment to the relators of a share of the damages and attorneys fees under the federal and California state False Claims Acts. The defendants have not been served with process and have not appeared in the action or responded to the pleadings, and there have been no proceedings in the case.
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, 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, 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.
For the year 2006, the fair value of each option award on the date the grant was calculated by using a Binomial option-pricing model and is amortized to expense on a straight line basis over the vesting period. For 2005, and 2004, a Black-Scholes option-pricing model was used to calculate the fair value of each option award on the date of the grant. The pricing models use the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of options granted is derived from previous history of stock exercises from the grant date and represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate option exercise and employee termination assumptions under the valuation models. The Company has never paid dividends on its common stock and does not anticipate doing so in the foreseeable future.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company incurred stock-based compensation expense of $0.4 million. The Company did not realize a tax benefit because it had a net operating loss for the current year. Upon a return to profitability, the Company will record a tax benefit for stock-based compensation expenses when the Company records profits. For the years 2005 and 2004, the Company recorded compensation expense of $0.1 million and $0.1 million, respectively.
Restricted stock award activity under the Plans through December 31, 2006 is as follows:
As compensation expense for restricted stock awards granted is recorded over the vesting period of the awards, future stock-based compensation expense may be greater if additional performance shares are granted.
The Company acquired Chronimed in March, 2005, Northland in October, 2005, and Burbank in March, 2006.
Based on its evaluation of the effectiveness of the design and operation of our internal control over financial reporting as December 31, 2006, management has evaluated and verified through testing that material weaknesses reported in 2005 Form 10-K related to accounts receivable and revenue recognition have been effectively remediated.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the Company’s financial transactions;
Provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Management assessed our internal control over financial reporting as of December 31, 2006, 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.
An internal control material weakness (as such term is defined under Public Company Accounting Oversight Board Standard No. 2) is a deficiency or combination of deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
Inadequate controls over the segregation of duties and restriction of employee access to applications, databases, and operating systems;
Ineffective controls over the documentation, testing, approval and migration of system changes to production environments; and,
This material weakness affects the processing of information related to all significant accounts in the financial statements and could potentially result in a material misstatement of the financial statements.
Given the material weakness, 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 schedule included herein in this Form 10-K fairly present in all material respects our financial position, results of operations and cash flows for the periods presented. We have created and commenced implementing a remediation plan to address the aforementioned material weakness.
Management believes that the aforementioned material weakness continued in 2006 as a result of the direction of IT resources towards other business priorities. Those priorities were:
The tactical decision to first remediate the accounts receivable and revenue recognition material weaknesses also reported in 2005 which were successfully remediated in 2006.
On February 1, 2007, Mr. Douglas Lee joined us as Vice President and Chief Information Officer. Mr. Lee is responsible for leading our information technology function, defining and implementing our strategic use of information technology, and ensuring that the technology investment is positioned to support our growth. A cornerstone of our IT strategy is to implement a process-focused philosophy. Policies and procedures will be revised to address any current design limitations in parallel with training and reinforcement the control practices.
Changes to system software - Our information technology function will be adopting a new change management process in 2007 to increase the discipline with which we document, test, approve and migrate changes to our production environment. In addition, improved tools and methodologies across the IT environment will be implemented to ensure we have visibility to all changes to the production environment.
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, 2006, because of the effect of ineffective information technology controls, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). BioScrip, Inc.’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.
The Company identified a material weakness in internal control over financial reporting related to information technology general controls as a result of the aggregation of the following control deficiencies:
This material weakness affects the processing of information related to all significant accounts in the financial statements and could potentially result in a material misstatement to the financial statements.
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, 2007 in connection with our 2007 Annual Meeting of Stockholders.
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2006, 2005 and 2004
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.
Amendment No. 1 dated January 3, 2005 to Agreement and Plan of Merger dated August 9, 2004 by and among MIM Corporation, Chronimed Acquisition Corp. and Chronimed Inc
Employment Letter, dated October 15, 2001, between the Company and Russell J. Corvese
Second Amendment and Consent, dated as of January 31, 2002, to the Receivable Purchase and Transfer Agreement, dated as of November 1,
Amendment, dated December 1, 2004, to Employment Letter Agreement for Russel J. Corvese
Letter Agreement, dated May 31, 2005, between BioScrip, Inc. and Alfred Carfora
Amendment to Change of Control Severance Agreement between the Company and Brian Reagan
Separation Agreement, dated May 25, 2006, between BioScrip, Inc. and Gregory H. Keane
Severance Letter Agreement, dated June 21, 2006, between BioScrip, Inc. and Stanley G. Rosenbaum
Extension and Seventh Amendment to the Receivables Purchase and Transfer Agreement
Letter Agreement, dated November 15, 2006 and executed November 17, 2006, between BioScrip, Inc. and Anthony Zappa
Certification of Richard H. Friedman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
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, SEC Accession No. 0001089355-00-000530.
Incorporated by reference from the Company’s definitive proxy statement for its 2002 annual meeting of stockholders filed with the Commission April 30, 2002.
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 Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 13, 2003.
Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on March 1, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on July 11, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on July 19, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on August 21, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on October 27, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on December 4, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on March 12, 2007.
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.
Certification of Richard H. Friedman pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Richard H. Friedman pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
On March 12, 2005 the Company acquired all of the issued and outstanding stock of Chronimed Inc. (“Chronimed”) in a stock-for-stock transaction. The acquisition resulted in an organization that is able to offer broader disease coverage, focused therapy management, expansive national retail and mail distribution capabilities and a pharmacy benefit management (“PBM”) platform.
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. On March 1, 2006 the Company acquired all of the issued and outstanding stock of Intravenous Therapy Services, Inc. All acquisitions have been consolidated since the date of purchase and all significant intercompany accounts and transactions have been eliminated in consolidation.
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 resulting in an $0.8 million intangible impairment charge in fourth quarter 2005. During 2006, no impairments of intangibles existed.
As part of the process of preparing the Company’s consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes under SFAS 109, Accounting for Income Taxes (“SFAS 109”). SFAS 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 the Company will not be able to realize the benefit from its deferred tax assets.
In addition, the Company has established, and periodically reviews and reevaluates an estimated income tax reserve. This income tax reserve is for exposures related to various Federal and state tax matters. An accrual is 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 the Company believes that it has identified all reasonably identifiable exposures and that the reserve it has 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 the Company to either increase or reduce the carrying amount of its income tax reserve.
At December 31, 2006, the Company has a number of stock-based employee compensation plans (the “Plans”) pursuant to which incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), restricted stock, performance units and performance share awards may be granted to employees and non-employee directors. Option and stock awards are typically settled by issuing authorized but unissued shares of the Company. As of December 31, 2006, approximately 0.8 million shares remain available for grant under the Plans.
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. Goodwill, described in SFAS 141, Paragraph 43 as “the excess of the cost of an
the opportunity to combine the companies’ individual strengths in payor contracting, physician sales, manufacturer services, clinical management and fulfillment;
the opportunity to broaden the Company’s suite of disease states and customer base;
Customer lists acquired from Chronimed are amortized over twenty-four months. In conjunction with the rebranding of all business lines to a single brand, the tradenames acquired from Chronimed were fully amortized as of December 31, 2005.
The Company follows SFAS 141 and Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, (“SFAS 142”) in accounting and reporting for its 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. Goodwill is 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 or whenever there is an impairment indicator. Under SFAS 141, 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 recorded a goodwill impairment of $18.6 million in the fourth quarter of 2005 primarily due to the loss of Centene Corporation and other PBM Services contracts. The loss of those contracts had a material negative impact on the long term financial outlook for the PBM Services segment.
The following table details the acquired intangible assets and their accumulated amortization as of December 31, 2006 (in thousands):
The Company’s net intangible assets as of December 31, 2006 are composed of customer relationships and non compete agreements associated with the acquired businesses. The adjusted expected amortizable life of these assets ranges from two to ten years.
The weighted average interest rate on the Facility at December 31, 2006 was 7.61%. The Facility contains various covenants that, among other things, require the Company to maintain certain financial ratios, as defined in the agreements governing the Facility. The Company received a waiver from HFG on a certain financial ratio - debt to earnings before interest, taxes, depreciation and amortization - that it was not in compliance with as of December 31, 2005, due to the goodwill and intangible asset impairment and accounts receivable reserve charges incurred in fourth quarter 2005. The Company was in compliance with all covenants as of December 31, 2006.
At March 15, 2007 the Company had $33.4 million of credit available under 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
plaintiffs’ motion to reinstate the complaint. The Company has reached a settlement with one of the two plaintiffs. Plaintiff’s counsel is unable to locate the original plaintiff.
Rent expense for non-related party leased facilities and equipment was approximately $3.9 million, $4.3 million and $1.5 million for the years ended December 31, 2006, 2005 and 2004, respectively. Rent expense for related party leased facilities was approximately $0.1 million for each of the years ended December 31, 2005 and 2004. All related party leases have been terminated.
The Company acquired capital leases totaling $0.1 million in connection with the purchase of Burbank. Payments of $0.1 million were made against these leases and at December 31, 2006 the Company had no material facilities or equipment under capital leases.
The Company’s Federal and state income tax provision (benefit) is summarized in the following table (in thousands):
At December 31, 2006, the Company had Federal NOL carryforwards of approximately $21.6 million, of which $14.0 million is subject to an annual limitation, all of which will begin expiring in 2017 and later. If the NOL 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 Company has state NOL carryforwards remaining of approximately $21.2 million, the majority of which will begin expiring in 2017 and later.
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, 2006, there remain 629,611 shares available for grant under the Plans.
The provisions of the 1996 and 2001 Plans allow plan participants to use shares to cover tax withholding on stock options. Upon exercise of the stock options, participants have taxable income subject to statutory withholding requirements. The number of shares issued to participants may be reduced by the number of shares having a market value equal to the minimum statutory withholding requirements for federal, state and local tax purposes.
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 the Company’s stockholders. As amended, the Directors Plan has 500,000 shares authorized, and allows for 5,000 shares per year to be automatically granted to each Outside Director, and 20,000 NQSOs to be automatically granted to Outside Directors upon his or her initial appointment or election to the Board. 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. As of December 31, 2006, options to purchase 325,000 shares are outstanding at an average exercise price of $6.17. The number of shares exercisable was 221,671 with 175,000 shares available for grant.
Stock option activity under the Plans through December 31, 2006 is as follows:
As of December 31, 2006, there was $0.9 million of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.5 years. The total grant date fair market value of awards vested during the years ended December 31, 2006, 2005 and 2004 was $0.5 million, $0.0 million and $0.1 million, respectively.