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. See Note 4 of Notes to Consolidated Financial Statements.
Reflects merger, integration and re-branding expenses related to the Company’s acquisition of Chronimed on March 12, 2005.
In 1999, we recorded $6.0 million of TennCare® reserve adjustments for estimated losses on contract receivables relating to Tennessee Health Partnership (“THP”), Preferred Health Plans and Xantus Health Plans of Tennessee, Inc. (“Xantus”). During 2001, we recorded a reserve adjustment credit of $1.0 million to reflect a favorable settlement with THP relative to the amount initially reserved in 1999. In the third quarter of 2001 and the first quarter of 2002, we recorded TennCare® reserve adjustment credits of $1.5 million and $0.9 million, respectively, as a result of the collection of the receivables reserved in 1999 from Xantus.
Net income in 2003 includes a $0.6 million charge, net of tax, related to a settlement with our founder, E. David Corvese, and a restructuring charge of $0.9 million, net of tax.
Net loss in 2005 includes a $4.3 million charge, net of tax, in the fourth quarter to reflect an increase in the allowance for doubtful accounts receivable created by lower than expected collections during the merger integration period.
The 2005 net loss per diluted share excludes the effect of common stock equivalents, as their inclusion would be anti-dilutive.
This Report contains statements not purely historical and which may be considered forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding our expectations, hopes, beliefs, intentions or strategies regarding the future. These forward looking statements may include statements relating to our business development activities, sales and marketing efforts, the status of material contractual arrangements, including the negotiation or re-negotiation of such arrangements, future capital expenditures, the effects of regulation and competition on our business, future operating performance and the results, benefits and risks associated with integration of acquired companies. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties; that actual results may differ materially from those possible results discussed in the forward-looking statements as a result of various risks, uncertainties and other factors. You should not place undue reliance on such forward-looking statements as they speak only as of the date they are made, and we assume no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
On March 12, 2005 we acquired all of the issued and outstanding stock of Chronimed Inc. (“Chronimed”) in a stock-for-stock transaction. The companies had a shared vision of balanced health care cost containment with better patient outcomes and localized distribution, providing high-touch care to the chronically ill and 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.
Our services are organized under two operating segments: (i) specialty pharmacy distribution and clinical management services (collectively, “Specialty Services”) which are provided through our community pharmacy, infusion services, and specialty mail pharmacy businesses; and (ii) pharmacy benefit management and traditional mail services (collectively, “PBM Services”).
Historically, our PBM Services were offered to Plan Sponsors and were designed to promote a broad range of cost-effective, clinically appropriate pharmacy benefit management services through our network of retail pharmacies and our dedicated traditional mail service distribution facility. Over the past several years we have focused on building our Specialty Services for strategic growth. Consequently, the PBM Services’ managed care business has decreased as a percentage of total revenue.
As part of our business we develop and maintain existing relationships with pharmaceutical manufacturers through a dedicated Pharmaceutical Relations department. These efforts have been concentrated on the creation and execution of new drug distribution and service contracts in our core specialty therapeutic areas, including providing those medications used for the treatment of Cancer, Multiple Sclerosis, HIV, Immune Deficiency and other patients living with chronic illnesses and life threatening diseases. The specialty management services that we provide through our national mail pharmacy, community pharmacies and infusion businesses are attractive to the pharmaceutical manufacturer community, demonstrated by recent successes in being selected for participation in national specialty distribution networks for newly approved, high-cost medications. These new contracts provide new sales and revenue opportunities which we began to realize in 2005 and expect to continue in 2006 and beyond.
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, 2005, 2004 and 2003.
Payables to Plan Sponsors represent the sharing of pharmaceutical rebates with the Plan Sponsors as part of our PBM Services segment. We estimate the portion of those pharmacy rebates that are shared with Plan Sponsors and adjust pharmacy rebates payable to Plan Sponsors when the amounts are paid, typically on a quarterly basis in arrears, or as significant events occur. These estimates are recorded based on actual and estimated claims data and agreed upon contractual rebate sharing rates. We adjust these estimates on a periodic basis based on changing circumstances such as contract modifications, product mix subject to rebates, and changes in the applicable formulary.
In 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
We account for acquisitions under the purchase method of accounting. Accordingly, any assets acquired and liabilities assumed are recorded at their respective fair values. The recorded values of assets and liabilities are based on third party estimates and independent valuations. The remaining values are based on management’s judgments and estimates. Accordingly, our financial position or results of operations may be affected by changes in estimates and judgments used to value these assets and liabilities.
Revenue. Total reported revenue for the year ended December 31, 2005 increased $442.7 million, or 70.2%, to $1,073.2 million from $630.5 million for the same period in 2004. This increase was concentrated in the Specialty Services segment and is primarily attributable to the acquisition of Chronimed (discussed in Note 4 of the Notes to Consolidated Financial Statements), the results of which are included in our Consolidated Statements of Operations starting March 12, 2005.
On a pro forma combined basis, revenue for the year ended December 31, 2005 was $1,187.3 million compared to $1,219.6 million for the same period in 2004, a $32.3 million, or 2.6%, decrease. The discussion below explains the primary reasons for these revenue changes in each of our segments, Specialty Services and PBM Services.
On a pro forma basis, PBM Services revenue for the year ended December 31, 2005 was $384.7 million compared to $379.0 million for the same period in 2004, a $5.7 million, or 1.5% increase. New members from existing contracts, as well as additional contracts, offset the termination of certain PBM clients, the most significant being Value Options, which terminated its contract with us effective November 30, 2004. Revenue from Value Options and certain other terminated PBM clients was $58.9 million in 2004. On December 21, 2005, we were notified by a material PBM Services’ customer, Centene Corporation, that it had acquired its own PBM business and would be transitioning its PBM business with us to its own PBM throughout 2006. PBM Services revenue in 2006 is expected to decrease approximately $150 million as Centene transitions this business throughout the year and as a result of other contract termination notices received at the end of 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
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 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.
Amortization of Intangibles. For the year ended December 31, 2005 we recorded amortization expense from intangibles of $6.4 million compared to amortization expense from intangibles of $3.0 million in 2004. The increase in 2005 was the result of increased amortization expense associated with the Chronimed acquisition and its related amortizable intangible assets, which was partially offset by the second quarter write-off of the trade name assets associated with Natural Living, Inc. and Vitality Home Infusion Services, Inc. due to the rebranding strategy previously disclosed.
Pro forma amortization expense for the year ended December 31, 2005 was $7.4 million compared to $8.0 million in 2004, a decrease of $0.6 million. This decrease is due primarily to the write-off of trade name assets discussed above.
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.
Selling, General and Administrative Expenses. For the year ended December 31, 2004, SG&A expenses increased to $50.9 million from $48.9 million, while decreasing as a percent of revenue to 8.1% for the year ended December 31, 2004 compared to 8.3% for the year ended 2003. The spending increase is due to overall revenue volume growth.
Bad Debt Expense. For the year ended December 31, 2004 we recorded bad debt expense of $1.9 million, an increase of $0.2 million, or 11.4%, compared to $1.7 million in 2003. The increase is commensurate with the increase in accounts receivables.
Pro forma bad debt expense for the year ended December 31, 2004 was $6.1 million compared to $5.3 million in 2003, an increase of $0.8 million, or 14.4%. The increase is commensurate with the increase in accounts receivables.
Amortization of Intangibles. For the year ended December 31, 2004 we recorded amortization expense from intangibles of $3.0 million compared to amortization expense from intangibles of $1.9 million in 2003. The increase in 2004 was the result of increased amortization expense associated with the Natural Living, Inc. acquisition in February 2004.
Net Income and Earnings Per Share. Net income for 2004 was $7.0 million, or $0.31 per diluted share, compared to net income of $9.1 million, or $0.40 per diluted share, for 2003. The decrease is principally the result of the factors enumerated above, including the TennCare and Synagis revenue losses. Pro forma net income for the year ended December 31, 2004 was $9.6 million, or $0.26 per diluted share, compared to pro forma net income of $11.5 million, or $0.31 per diluted share, for the year ended December 31, 2003.
We utilize both funds generated from operations and available credit under our Facility (as defined below) for acquisitions, capital expenditures and general working capital needs.
For 2005, net cash used in operating activities totaled $6.4 million compared to $3.3 million provided by operating activities for 2004. The decrease in operating cash flows from 2004 to 2005 was the result of increases in accounts receivable balances of $21.5 million, inventory of $3.6 million and decreases in accrued expenses of $14.9 million, partially offset by the decreases in prepaid assets of $1.2 million and increases in accounts payable of $11.1 million and claims payable of $2.7 million.
Net cash provided by investing activities in 2005 was $3.1 million compared to net cash used in investing activities of $17.1 million in 2004. The change was driven primarily by the 2004 acquisition of Natural Living, Inc.
At December 31, 2005, we had working capital of $67.5 million compared to $14.0 million at December 31, 2004. The increase in working capital primarily is attributable to the acquisitions of Chronimed and JPD, Inc. d/b/a Northland Medical Pharmacy (“Northland”) in 2005.
At December 31, 2005 there were $7.4 million of outstanding bank borrowings under our revolving credit facility (the “Facility”) with an affiliate of Healthcare Finance Group, Inc. (“HFG”), a $0.1 million increase from the same period in 2004. At December 31, 2005 the Facility provided for borrowings of up to $45 million at the London Inter-Bank Offered Rate (LIBOR) plus 2.4%, with interest paid monthly. The Facility automatically renews for additional one-year terms unless either party gives notice not less than 90 days prior to the expiration of the initial term or any renewal term, currently November 1, 2006, of its intention not to renew the Facility. The Facility permits us to request an increase in the amount available for borrowing up to $100 million, as well as to convert a portion of any outstanding borrowings from a Revolving Loan into a Term Loan. The Facility was increased from $45 million to $65 million in March 2006 to allow for acquisitions and general working capital needs. The borrowing base is based on receivables balances, among other things.
The Facility contains various covenants that, among other things, require us to maintain certain financial ratios, as defined in the agreements governing the Facility. We have received a waiver from HFG on a certain financial ratio (debt to earnings before interest, taxes, depreciation and amortization) that we were not in compliance with as of December 31, 2005, due to losses incurred in fourth quarter 2005 as a result of goodwill and intangible asset impairment and accounts receivable reserve charges. We were in compliance with all other covenants.
We also may pursue joint venture arrangements, business acquisitions and other transactions designed to expand our business, which we would expect to fund from cash on hand, borrowings under the Facility, other future indebtedness or, if appropriate, the private and/or public sale or exchange of our debt or equity securities.
We expect our 2006 annual effective tax rate to be approximately 39%. This rate differs from the Federal statutory rate of 34% primarily due to state taxes.
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. As of December 31, 2005, we used, in the aggregate, approximately $5.1 million of that authorization. No stock was repurchased during 2005 or 2004.
The acquisition of Chronimed has resulted in the consolidation of certain finance and information technology (IT) functions. The Company’s two Rhode Island offices, which included the finance and IT functions, have been closed as a result of these consolidations. These functions were fully transitioned to the Company’s Minnesota offices as of December 31, 2005. Accordingly, there have been severance and closure costs associated with the consolidation.
In connection with the consolidation of the finance and IT departments as described above, on March 4, 2005 the Company notified 67 employees that their employment with the Company would be involuntarily terminated. All of these terminations were the result of the purchase of Chronimed and were expensed in the Specialty Services segment. All employees were terminated by December 31, 2005. Severance costs of $2.3 million were recorded in SG&A expenses for employee separation costs in 2005, in connection with the termination of these employees. In September and December of 2005 the two Rhode Island offices were closed, resulting in $0.4 million of expense recorded in SG&A. We do not anticipate any further restructuring costs associated with the merger of Chronimed.
On April 18, 2003, the U.S. Department of Health and Human Services, Office of Inspector General (“OIG”) released Compliance Program Guidance for Pharmaceutical Manufacturers (the “Guidance”) designed to provide voluntary, nonbinding guidance to assist companies that develop, manufacture, market and sell pharmaceutical products or biological products, including PBM’s in devising effective compliance programs. The Guidance provides the OIG’s view of the fundamental elements of pharmaceutical manufacturer’s compliance programs and principles that should be considered when creating and implementing an effective compliance program, or as a benchmark for companies with existing compliance programs. We currently maintain a compliance program that includes the key compliance program elements described in the Guidance. We believe that the fundamental elements of our compliance program are consistent with the principles, policies and intent of the Guidance.
At December 31, 2005, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, claims payable, payables to plan sponsors and others, debt and line of credit approximate fair value due to their short-term nature.
Through its BioScrip® specialty injectable and infusion therapy programs, the Company distributes high-cost pharmaceuticals and provides clinically focused case and disease management programs to Members afflicted with chronic illnesses or genetic impairments. The disease states or conditions for which the Company has such programs include HIV/ AIDS, Immune Deficiency, Cancer, Hemophilia, Multiple Sclerosis, Growth Hormone Deficiency, Gaucher’s Disease, Rheumatoid Arthritis, Infertility, Hepatitis C, Psoriasis, Crohn’s Disease and Transplants. The specialty drugs distributed through the BioScrip® programs are dispensed and serviced from the Company’s 36 mail, infusion and community specialty pharmacy locations across the United States.
The Company is reimbursed for the medications and services it sells by Plan Sponsors. Revenues and related accounts receivable are recorded net of payor contractual discounts to reflect the estimated net billable amounts for the products and services delivered. The Company estimates the allowance for contractual discounts, based on historical experience and in certain cases on a customer-specific basis, given its interpretation of the contract terms or applicable regulations. However, the reimbursement rates are often subject to interpretation that could result in payments that differ from estimates. Additionally, updated
Claims payable represent the dollar value of prescriptions processed or “adjudicated” in the Company’s PBM Services business that are to be reimbursed to participating network pharmacies as of the balance sheet date. The Company is responsible for all covered prescriptions provided to PBM plan members processed through its network pharmacies during the contract period. Claims are adjudicated through its on-line adjudication system. These claims become a liability to the Company at the point of adjudication, which is when it has agreed that the prescription claim is valid, correctly priced and due to the network pharmacy for a participating PBM plan member.
The Company generates revenue principally through the sale of prescription drugs, which are dispensed either through a pharmacy participating in the Company’s retail pharmacy network or a pharmacy owned by the Company. 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.
The Company evaluates 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.
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 No. 109, Accounting for Income Taxes (“SFAS No. 109”). 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 the Company will not be able to realize the benefit from its deferred tax assets.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payments, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach to estimating the fair value of options in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative and SFAS No. 123(R) must be adopted no later than January 1, 2006. Had the Company adopted SFAS No 123(R) in prior periods, the impact of that standard would have approximated the impact
of SFAS No. 123 as described above. The Company 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 shares-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 grants through the date of this report. The Company expects additional grants to be made during the remainder of 2006, the impact of which is not estimable at this time.
In May 2005, FASB issued SFAS 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. FASB believes that SFAS 154 improves financial reporting because its requirements enhance the consistency of financial information between periods. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS 154 is not expected to have a material impact on the Company’s condensed consolidated financial statements.
The year ended December 31, 2005 includes $18.6 million of goodwill impairment in the PBM Services segment.
The Company has completed the process of rebranding to a single name, BioScrip, in 2005; as a result, all legacy trade names were written off in the second quarter of 2005; this writeoff totaled $5.8 million. A tradename acquired with the Chronimed purchase was valued at $0.4 million and completely amortized in 2005.
The Company’s net intangible assets as of December 31, 2005 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 Company had a consulting arrangement with one of its board members which, in addition to customary board fees, the board member’s company received a monthly fee to perform consulting work predominantly related to the TennCare® program. Consulting fees under this contract were $0.8 million for the year ended December 31, 2003. The contract was terminated June 30, 2003.
One of the Company’s former board members, who resigned in February 2006, was an employee of the Company’s primary outside legal services firm. Fees were paid to that legal firm of $2.1 million, $1.1 million, and $0.6 million for the years ended December 31, 2005, 2004 and 2003, respectively.
update its prescription pricing files on a daily, rather than weekly, basis. ScripSolutions removed the case to the United States Federal District Court for the Middle District of Alabama in April 2005. The plaintiff moved to remand the action to state court, which ScripSolutions opposed. ScripSolutions also moved in May 2005 to dismiss the complaint on jurisdictional grounds or to transfer the matter to a federal court in New York or Rhode Island which the plaintiff opposed. On October 6, 2005, the District Court granted Plaintiff’s motion to remand the case to the state court and did not decide ScripSolutions’ motion to dismiss or transfer. The district court did not rule on the Company’s motion to dismiss or transfer the action and remanded the action to the Alabama State court. ScripSolutions appealed that decision to the Eleventh Circuit Court of Appeals. The U.S. Court of Appeals for the Eleventh Circuit has declined to review the district court’s remand discussion and denied the Company’s motion for rehearing of the decision. The Company’s time to seek further appellate review has not yet expired. ScripSolutions has not filed an answer to the complaint and no other proceedings have occurred. ScripSolutions intends to deny the plaintiff’s allegations and defend the claims vigorously. The action is one of approximately 14 substantially identical actions commenced in Alabama courts against Pharmacy Benefit Management companies.
The U.S. Attorney’s Office in Boston and the Department of Justice have informed the Company that its subsidiary, BioScrip Pharmacy, is a defendant in a Qui Tam lawsuit under the federal False Claims Act filed by a whistleblower against Serono, Inc., and several other defendants. The government has settled the Qui Tam claims in the lawsuit with Serono, Inc., and has not yet made a decision to intervene in the suit against remaining defendants. No complaint has been served on the Company and it has had only limited opportunity to review it as it is filed under seal in the United States District Court for the District of Massachusetts. The government however has invited BioScrip to explore settlement. For purposes of settlement discussions, the government’s estimate of damages is close to $10.0 million, which allegedly resulted from claims for government reimbursement made by StatScript during 1997 through 2000 for the sale of Serono’s drug Serostim. The government alleges that these claims are tainted by data sharing and preferred provider agreements between Serono and BioScrip Pharmacy. According to a government attorney, as part of its settlement, Serono agreed to pay 50% of damages allegedly resulting from its relationships with pharmacies, which should include 50% of the amount attributed to the StatScript sales. American Prescription Providers (APP) also is reported to be a defendant in the same lawsuit. The Company’s Chronimed, Inc. subsidiary purchased several pharmacies from APP in February 2001, after the time period at issue in the Qui Tam case. Currently, the government is separately discussing directly with APP settlement of the alleged APP damages of approximately $7,500,000. It is not known at this time whether APP or the government will take the position that the Company is liable for the alleged APP damages.
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
The Company entered into a corporate integrity agreement (“CIA”) with the Office of Inspector General (the “OIG”) within the Department of Health and Human Services (“HHS”) in connection with the Global Settlement Agreement entered into with the OIG and the State of Tennessee in June 2000. In order to assist the Company in maintaining compliance with laws and regulations and the CIA the Company implemented its corporate compliance program in August of 2000. This program includes educational training for all employees on compliance with laws and regulations relevant to the Company’s business and operations and a formal program of reporting and resolution of possible violations of laws or regulations, as well as increased oversight by the OIG. Should the oversight procedures reveal credible evidence of any violation of Federal law, the Company is required to report such potential violations to the OIG and the Department of Justice (“DOJ”). The Company is therefore subject to increased regulatory scrutiny and, if the Company commits legal or regulatory violations, they may be subject to an increased risk of sanctions or penalties, including suspension or exclusion from participation in the Medicare or Medicaid programs. The CIA expired by its term June 30, 2005 as evidenced by a letter from the OIG confirming the expiration of the CIA.
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, 2005, options to purchase 320,000 shares are outstanding at an average exercise price of $6.69 and 195,000 shares under the Directors Plan were exercisable with 180,000 shares available for grant.
In July, 2005, the Company granted options to purchase 1,620,950 shares at $6.00 to key employees, subject to meeting certain financial and qualitative performance criteria for 2005. In March, 2006, upon final review of 2005 performance, a total of 1,511,010 options were canceled against the original grant as a result of the Company not achieving certain performance criteria, leaving a final grant of 109,940 options. These remaining options vest over three years starting March 2006.
Under the Plans, the Company’s Board of Directors may grant stock to key employees. The Board of Directors may make the issuance of common stock subject to the satisfaction of one or more employment, performance, purchase or other conditions. As of December 31, 2005, the Company has 136,000 restricted stock grants (the “Performance Shares”) that vest and become exercisable 8 years from the date of grant. The Company has recorded cumulative compensation expense of $0.7 million related to these Performance Shares through December 31, 2005 based on the fair market value at the date of grant. Based on outstanding number of shares, the deferred compensation expense at December 31, 2005 is $0.1 million. The total expense recorded for 2005, 2004 and 2003 was $0.1 million, $0.1 million and $0.2 million, respectively.
During 2003, in association with a cost structure review related to the loss of the TennCare® PBM business the Company notified 55 employees in the PBM Services segment that their employment with the Company would be involuntarily terminated. As a result the Company recorded $1.5 million of selling, general and administrative expenses for employee separation costs, primarily severance and contract related termination payments, in 2003. All the employees left active payroll by October 31, 2003.
In the fourth quarter of 2004, the Company recorded $0.5 million, net of tax, for a settlement with Value Options of Texas, Inc., a client in the PBM Services segment.
The evaluation of our disclosure controls included a review of the controls objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Annual Report. Based upon the controls evaluation, our CEO and CFO have concluded that as a result of the matters discussed below with respect to our internal control over financial reporting, our disclosure controls as of December 31, 2005 were not effective.
Based on management’s assessment of internal control over financial reporting as of December 31, 2005, we have identified and reported to our Audit Committee the following material weaknesses in internal control over financial reporting.
In the area of information technology, we identified the following ineffective controls which we believe constitute a material weakness in the aggregate:
Ineffective processes and controls to ensure timely collection efforts on past due outstanding accounts receivable;
Our independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting which is included herein.
operations and cash flows for the periods presented. We have created and commenced implementing a remediation plan to address the aforementioned material weaknesses.
Management believes that the aforementioned material weaknesses result primarily from issues associated with the integration of the information technology, accounting, collections and cash posting functions into a single location in Minnesota following the acquisition of Chronimed in March 2005. The integration has required a significant amount of new hiring, training, knowledge transfer, process redesign and policy implementation that has impacted the control environment as of December 31, 2005. In addition, the Company has made a number of acquisitions in recent years that resulted in the Company operating and maintaining a number of different information systems.
We are in the process of consolidating our pharmacy operating systems, and have already consolidated to one general ledger system. Through consolidation we continue to focus on IT controls. We are addressing the following items to improve our information technology controls:
General ledger data base monitoring controls - We have engaged a general ledger software consultant to create a control that will identify any changes made by any IT employee that would have access to the general ledger production data base. We expect the control to be implemented in second quarter 2006. Access to the general ledger data base is already restricted to two individuals in the IT department.
Changes to system software - Our information technology function has implemented a new system that identifies all changes to our production software systems. This will allow us to immediately detect such changes and therefore be certain that we have the appropriate management, user and IT approvals as we install enhancements to the production environment. In addition, we have restricted the ability to make changes to our production software systems to a limited number of individuals in the IT function.
We consolidated the majority of our collections and cash posting functions in fourth quarter 2005 into one location in Minnesota. We hired new resources, experienced employee turnover, transferred knowledge from
former employees, and created new processes. The transaction volume exceeded our human resource capacity. To remedy the material weaknesses in accounts receivable:
We have appointed a full time project executive to drive improvements in receivables performance.
We are adding personnel to increase our cash collection rates on both old and new accounts, and to resolve customer overpayments on a more timely basis. Also, we are developing an automated workflow and collection tool which we intend to implement in the second quarter for both our community and mail pharmacies that will focus our collectors’ efforts and better measure performance.
We implemented an improved process to quantify and document our estimates for uncollectible accounts in the fourth quarter of 2005. We will continue to refine our methodology in 2006.
Except as noted above, there have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The discussion above under “Management Remediation Plan” describes a number of changes we have initiated since December 31, 2005, as well as other changes that we plan to implement in 2006, that we believe will significantly improve our internal control over financial reporting.
A material weakness is a control deficiency, or combination of control 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. The following material weaknesses have been identified and described in management’s assessment:
a. Inadequate control over segregation of duties, and restriction of employee access to application modules within the Company’s financial and operating systems, including its general ledger system.
c. Ineffective controls over the documentation, approval, testing and migration of system changes to production environments.
a. Inadequate system and manual controls to prevent the overstatement of revenue for cancelled orders and other non-standard transactions in its community pharmacies. Controls failed to detect necessary revenue adjustments that were more than inconsequential but not material. Furthermore, the failure of its controls could potentially result in revenue adjustments of a material amount.
b. Ineffective processes and controls to ensure timely collection efforts on past due outstanding accounts receivable.
In our opinion, management’s assessment that BioScrip, Inc. did not maintain effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, BioScrip, Inc. has not maintained effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
Agreement and Plan of Merger, dated as of August 9, 2004, among MIM Corporation, Chronimed Acquisition Corp. and Chronimed Inc.
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 Agreement between MIM Corporation and Richard H. Friedman dated as of December 1, 1998
Employment Agreement between MIM Corporation and Barry A. Posner dated as of March 1, 1999
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
Registration Rights Agreement-V between MIM Corporation and Richard H. Friedman and Leslie B. Daniels dated July 31,
Lease Agreement between Mutual Properties Stonedale L.P. and MIM Corporation dated April 23, 1997
Agreement between Mutual Properties Stonedale L.P. and MIM Corporation dated as of April 23, 1997
Lease Amendment and Extension Agreement-II between Mutual Properties Stonedale L.P. and MIM Corporation dated March 27, 1998
Corporate Integrity Agreement between the Office of the Inspector General of the Department of Health and Human Services and MIM Corporation, dated as of June 15, 2000
Lease Agreement, dated as of July 22, 1996, by and between American Disease Management Associates, LLC (“ADIMA”) and Regent Park Associates
First Amendment of Agreement of Lease, dated as of June 15, 1999, by and between ADIMA and Five Regent Park Associates
Second Amendment of Agreement of Lease, dated as of February 11, 2000, by and between ADIMA and Five Regent Park Associates
Asset Purchase Agreement, dated April 4, 2001 among Continental Managed Pharmacy Services Inc., Community Prescription Service, Inc., and its Stockholders
Purchase Agreement among American Disease Management Associates, L.L.C., its Members and Certain Related Partners, MIM Health Plans, Inc. and the Registrant, dated as of August 3, 2000 (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed August 10, 2000)
Employment letter, dated as of June 19, 2001, between MIM Health Plans, Inc and Michael Sicilian
Lease Agreement, dated as of January 31, 2002, between Bar-Marc Realty, LLC, as landlord, and Vitality Home Infusion Services, Inc., as Tenant
Employment Letter, dated October 1, 2002, between the Company and James S. Lusk
Amended and Restated 1996 Non-Employee Director’s Stock Incentive Plan (effective April 17, 2002)
Extension Agreement, dated as of June 30, 2003, to the Receivables Purchase and Transfer Agreement dated as of November 1, 2000, among Scrip Solutions, Inc., each of the parties named on Schedule I to the Original RPTA and MIM Funding LLC and consented to by HFG Healthco-4 LLC
Amendment, dated September 19, 2003, to Employment Letter Agreement entered into as of October 15, 2001, by and between Scrip Solutions, Inc. and Russel J. Corvese
Lease Amendment and Extension Agreement, dated August 31, 2003, by and between Scrip Solutions, Inc. and Mutual Properties Stonedale LLC
Employment Offer Letter, dated July 18, 2005 from the Company to Gregory H. Keane
Second Amendment, dated as of March 1, 2006, to Loan and Security Agreement, dated as of November 1, 2000, between MIM Funding LLC and HFG Healthco-4 LLC
Certification of Gregory H. Keane pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on March 17, 2005
Incorporated by reference to the indicated exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-05327), as amended, which became effective on August 14, 1996.
Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999.
Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000.
Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
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 Registration Statement on Form S-4, Registration No. 333-119098
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on October 28, 2004
We have audited the accompanying consolidated balance sheets of BioScrip, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2005. 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.
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
Effective on January 1, 2002, the Company 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.
The Company has two reporting units - Specialty Services and PBM Services. The fair value of Specialty Services exceeded its carrying amount resulting in no impairment charges in fiscal year 2005. The fair value of PBM Services was less than its carrying amount, resulting in an $18.6 million goodwill impairment charge in the fourth quarter of 2005, primarily as a result of contract terminations, including the termination of the Company’s contract with Centene Corporation, the Company’s largest PBM Services customer.
The Company accounts for leasing transactions by recording rent expense on a straight-line basis, starting on the date it gains possession of leased property, over the expected life of the lease. Lease terms are generally five years, with many containing options to extend for periods ranging from one to five years. The Company includes tenant improvement allowances received from landlords as adjustments reducing straight-line rent expense.
As compensation expense for options granted is recorded over the vesting period of options, future stock-based compensation expense may be greater as additional options are granted.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Basic (loss) income per common share is based on the weighted average number of shares outstanding, diluted income per share is based on the weighted average number of shares outstanding, including common stock equivalents, and diluted (loss) per share is based on the weighted average number of shares outstanding because the impact of common stock equivalents would be anti-dilutive (in thousands except per share data).
The year ended December 31, 2005 includes 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 in the Specialty Services segment.
The following table sets forth the estimated fair value of the assets and liabilities acquired with the purchase of Chronimed:
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. The following table outlines severance costs for the closing of the Minnetonka mail facility that were accrued for at March 12, 2005 and subsequently paid out by December 31, 2005:
The following unaudited consolidated pro forma financial information for the years ended December 31, 2005 and 2004 has been prepared assuming Chronimed was acquired as of the beginning of 2004, utilizing the purchase method of accounting, with certain pro forma adjustments for amortization of intangibles. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the actual results had the acquisition occurred at the beginning of each period. This pro forma financial information is not intended to be a projection of future operating results.
On February 2, 2004, the Company acquired all of the issued and outstanding stock of Natural Living, Inc., d/b/a Fair Pharmacy, a specialty pharmaceutical provider located in Bronx, New York for $15 million in cash, plus a performance-based earn-out of $4.0 million paid after the first anniversary of the closing. The acquisition enhanced the Company’s HIV, Cancer and Hepatitis C disease therapies and has been incorporated into the Company’s Specialty Services segment.
The acquisition of Chronimed resulted in the consolidation of certain finance and information technology (IT) functions. The Company’s two Rhode Island offices, which included finance and IT functions, have been closed as a result of these consolidations. These functions were fully transitioned to the Company’s Minnesota offices as of December 31, 2005. Accordingly, there have been severance and closure costs associated with the consolidation.
We do not anticipate any further restructuring costs associated with the merger of Chronimed.
The Company recorded $18.6 million of goodwill impairment in the fourth quarter of 2005 due primarily to the loss of Centene and other PBM Services contracts. The loss of these contracts has a significant 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, 2005 (in thousands):
Certain intangible assets associated with customer lists totaling $0.8 million were written off in the fourth quarter of 2005.
The amortization expense for the years ended December 31, 2005, 2004 and 2003 was $6.4 million, $3.0 million and $2.0, million respectively. The estimated amortization expense for the next five years is as follows (in thousands):
Property and equipment, at cost, consists of the following at December 31 (in thousands):
Effective June 30, 2003, the Company extended the Facility with HFG through November 1, 2006 at LIBOR plus 2.4%. The contract governing the Facility provides for automatic one year extensions unless either party gives notice not less than 90 days prior to the expiration of the initial term or any renewal term of its intention not to renew the Facility. The Facility, as extended, permits the company to request an increase in the amount available for borrowing to up to $100,000, as well as converting a portion of any outstanding borrowings from a Revolving Loan into a Term Loan. On March 1, 2006, the Facility was increased from $45 million to $65 million. The borrowing base utilizes receivables balances, among other things, as collateral. Daily borrowings during 2005 were $744.4 million of which $744.3 was repaid during 2005, resulting in an outstanding line of credit balance of $7.4 million as of December 31, 2005. The line of credit balance did not exceed $14.0 million at the end of any given month during 2005. 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.
On February 14, 2005, a complaint was filed in the Alabama Circuit Court for Barbour County, captioned Eufaula Drugs, Inc. v. ScriptSolutions [sic]. On April 8, an amended complaint was filed against ScripSolutions, a subsidiary of the Company. The plaintiff alleges breach of contract and related claims on behalf of a putative nationwide class of pharmacies alleging insufficient reimbursement for prescriptions dispensed, principally on the theory that ScripSolutions, one of the Company’s subsidiaries, was obligated to
At December 31, 2005 the Company had no facilities or equipment under capital leases.
As of December 31, 2005 and December 31, 2004 the Company has recorded a net deferred tax asset of $10.4 million and $4.5 million, respectively. This primarily consists of reserve balances which are not currently deductible for tax purposes and net operating loss carryforwards (“NOLs”).
The valuation allowance of $0.9 million relates to a capital loss carryover which is not expected to be realized for tax purposes. In 2004, $0.6 million of the balance in the valuation allowance represented state NOLs which were not expected to be realized for tax purposes. However, due to a change in tax structure and
a result of the merger, these amounts are now expected to be realized. Therefore, the valuation allowances relating to NOLs have been removed in 2005.
The Company’s reconciliation of the statutory rate to the effective income tax rate is as follows (in thousands):
Options granted under the Plans vest over a three-year period and, in certain limited instances, fully vest upon a change in control of the Company. In addition, such options are generally exercisable for 10 years after the date of grant, subject to earlier termination in certain circumstances. The exercise price of ISOs granted under the Plans will not be less than 100% of the fair market value on the date of grant (110% for ISOs granted to more than a 10% stockholder).
The maximum term of stock options under these plans is ten years. Options outstanding as of December 31, 2005 expire on various dates ranging from May 2006 through December 2015. The following table outlines our outstanding and exercisable stock options as of December 31, 2005:
The Company recorded $0.2 million, $0.5 million, $0.6 million, and $1.5 million of charges, net of tax, related to the Chronimed acquisition and merger, in each of the first, second, third and fourth quarters of 2005, respectively.