Our executive offices are located in Elmsford, New York, and our business offices are located in Eden Prairie, Minnesota. Our mail operations are located in Columbus, Ohio and San Francisco, California. Our pharmacies are located in major metropolitan locations across the United States. We currently lease all of our properties from third parties under various lease terms expiring over periods extending to 2012. Property locations are as follows:
Revenue includes: Centene Corporation PBM Services revenue of $47.1 million, $133.1 million, $102.1 million, $92.4 million and $49.7 million for the years 2006, 2005, 2004, 2003 and 2002, respectively; TennCare® PBM Services revenue of $67.8 million and $140.2 million for the years 2003 and 2002, respectively; and Value Options revenue of $19.7 million and $20.8 million for the years 2004 and 2003, respectively. Revenue from TennCare ended in 2003. Revenue from Value Options ended in 2004. Revenue from Centene Corporation ended in 2006.
Net income in 2004 includes a $0.5 million charge, net of tax, related to a settlement with Value Options of Texas, Inc.
Net loss in 2006 includes a $25.7 million income tax charge in the fourth quarter for the establishment of a valuation allowance recorded against deferred tax assets.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to assist the reader in understanding our consolidated financial statements, the changes in certain key items in those financial statements from year to year and the primary factors that accounted for those changes, as well as how certain accounting principles affect our consolidated financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. This discussion should be read in conjunction with our Consolidated Financial Statements, including the Notes thereto, and the information discussed in Part I, Item 1A - Risk Factors.
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.
Our services are reported under two operating segments: (i) Specialty Services; and (ii) PBM and traditional mail services (collectively, “PBM Services”).
Our Specialty Services are marketed and sold primarily to patients, physicians, pharmaceutical manufacturers and payors and are focused on chronic health conditions including potentially life threatening or debilitating diseases or genetic disorders which are treated with specialty medications. These services include the distribution of biotech and other high cost injectable, oral and infusable prescription medications and the provision of therapy management services.
We strive to maximize therapy outcomes through strict adherence to clinical guidelines or protocols for a particular prescription therapy while at the same time managing the costs of such therapies on behalf of a Plan Sponsor or patient.
As part of our PBM Services, we also administer numerous cash card or discount card programs on behalf of program sponsors or TPAs. These are 100% copay programs that provide savings to customers who present a discount card at one of our participating network pharmacies or who order medications through one of our mail order pharmacies. Under such programs we derive revenue on a per claim basis from the dispensing network pharmacy.
Our plan for 2007 and beyond is to increase the depth of our business by broadening our model to take advantage of our strength of services and differentiating assets. We will implement redefined Specialty Services models to allow for therapy optimization and the management of medications incidental to a physician’s service.
Revenue generated under PBM agreements is classified as either gross or net by us based on whether we are acting as a principal or an agent in the fulfillment of prescriptions through our retail pharmacy network. When we independently have a contractual obligation to pay a network pharmacy provider for benefits provided to its Plan Sponsors’ Members, and have other indicia of risk and reward, we include payments (which include the drug ingredient cost) from these Plan Sponsors as revenue and payments to the network pharmacy providers as cost of revenue, as these transactions require us to assume credit risk and act as a principal. If we merely act as an agent, and consequently administer plan sponsors’ network pharmacy contracts, we do not assume credit risk and record only the administrative fees (and not the drug ingredient cost) as revenue.
We are reimbursed for the medications and services we sell 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. We estimate the allowance for contractual discounts, based on historical experience and in certain cases on a customer-specific basis, given our 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 our estimates. Additionally, updated regulations and contract negotiations occur frequently, necessitating our continual review and assessment of the estimation process.
We evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets, including intangible assets, may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business.
In the fourth quarter of 2005 we evaluated goodwill for impairment and recorded a write off as described above. As part of goodwill impairment testing, we further determined that certain intangible assets associated with customer lists were no longer recoverable from future cash flows. This resulted in a $0.8 million intangible impairment charge in fourth quarter 2005. No further impairment existed at December 31, 2006.
The fair value of each option award is estimated on the date of grant using a binomial option-pricing model that uses the following assumptions: (i) expected volatility is based on the historical volatility of our stock, (ii) 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, and (iii) 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. We use historical data to estimate option exercise and employee termination assumptions under the valuation model.
Certain prior period amounts have been reclassified to conform to the current year presentation. Such reclassifications had no material effect on our previously reported consolidated financial position, results of operations or cash flows.
The following unaudited condensed consolidated pro forma financial information for the years ended December 31, 2005 and 2004 has been prepared as if the Chronimed acquisition had been consummated at the beginning of each respective period, utilizing the purchase method of accounting, with pro forma adjustments for amortization of intangibles associated with the acquisition. The number of basic and diluted shares has also been adjusted assuming we exchanged each outstanding share of Chronimed common stock for 1.12 shares of our common stock. We believe this information to be helpful in gaining an understanding of future financial and operating results and trends. In the following Management’s Discussion and Analysis we provide discussion of both the reported results as set forth in the Financial Statements and the pro forma results as presented in the following tables:
Selling, General and Administrative Expenses. For the year ended December 31, 2006, selling, general and administrative expenses (“SG&A”) increased to $116.8 million, or 10.1% of total revenue, from $96.5 million, or
Bad Debt Expense. For the year ended December 31, 2006 we recorded bad debt expense of $12.4 million, a decrease of $0.4 million compared to $12.8 million in 2005. The decrease is the result of increased resources added to enhance our collection process and improve receivable collection performance. While we believe our efforts contributed to the improved collections performance, there can be no assurance that it will continue to improve in 2007 and our results could be adversely impacted. See Item 1A. “Risk Factors” for additional information regarding billing and collecting risks.
Bad debt expense for the year ended December 31, 2006 was $12.4 million compared to $13.7 million on a pro forma basis for 2005, a decrease of $1.3 million. The decreased bad debt expense reflects a lower bad debt accrual rate due to an improvement in collections. The pro forma 2005 results reflect a 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.
Amortization expense for the year ended December 31, 2006 was $6.5 million compared to $7.4 million on a pro forma basis for 2005, a decrease of $0.9 million. This decrease is due primarily to the write-off in 2005 of trade name assets associated with Natural Living, Inc. and Vitality Home Infusion Services, Inc. due to the rebranding strategy. In first quarter 2007 the amortization of the intangible assets associated with the Chronimed acquisition will expire resulting in a decrease in amortization expense.
Pro forma merger related expenses for the year ended December 31, 2005 were $6.6 million and reflected $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.
Net interest expense was $3.0 million for the year ended December 31, 2006 compared to $0.3 million on a pro forma basis for the year ended December 31, 2005.
Provision for and Benefit from Income Taxes. The reported provision for income taxes was $19.0 million for 2006 compared to a reported benefit from income taxes of $5.7 million for 2005. The 2006 tax provision includes the establishment of a valuation allowance recorded against deferred tax assets. At December 31, 2006, we had Federal net operating loss carryforwards of $21.6 million which begin expiring in 2017 and later.
On a pro forma basis, Specialty Services revenue for the year ended December 31, 2005 was $802.6 million compared to $840.5 million for the same period a year ago, a $37.9 million, or 4.5% decrease. This decrease was due primarily to the loss of Chronimed’s specialty pharmacy distribution contract with Aetna that ended February 28, 2005, partially offset by growth in our community pharmacies. Revenue from Aetna was approximately $34.1 million for the year ended December 31, 2005 compared to $127.7 million for the previous year. Excluding the lost business from Aetna, Specialty Services grew 7.8%.
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.
receivable balances of $15.8 million, inventory of $7.1 million and a decrease in claims payable of $21.9 million, partially offset by the increase in accrued expenses of $4.4 million.
Recent legislation regarding CAP is expected to improve cash flow by authorizing payment of claims on a bi-weekly basis beginning April 1, 2007. In addition, that legislation authorized CMS to pay all open claims on April 1, 2007.
At December 31, 2006, we had working capital of $37.0 million compared to $67.5 million at December 31, 2005. The decrease in working capital primarily is attributable to the acquisition of Burbank in March 2006 and the creation of the valuation allowance against deferred tax assets.
At December 31, 2006 there were $52.9 million of outstanding bank borrowings under our revolving credit facility (the “Facility”) with an affiliate of Healthcare Finance Group, Inc. (“HFG”), a $45.5 million increase from the same period in 2005. The Facility was increased in July 2006 to provide for borrowings of up to $75 million at the London Inter-Bank Offered Rate (LIBOR) plus the applicable margin. Effective September 30, 2006, the Facility was extended for four years through November 1, 2010. The Facility permits us to request an increase in the amount available for borrowing up to $100 million, as well as converting 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.
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 were in compliance with all such covenants as of December 31, 2006.
program does not have a set expiration date, and repurchases under the program may be made at times and in amounts as our management deems appropriate, subject to restrictions under the Merger Agreement. No stock was repurchased during 2006 or 2005. As of December 31, 2006, approximately $4.9 million of the $10.0 million authorized remains available for additional share repurchases. We hold a total of 2,198,076 shares of treasury stock acquired under current and prior repurchase programs.
Exposure to market risk for changes in interest rates relates to our outstanding debt. At December 31, 2006 we did not have any long-term debt. We are exposed to interest rate risk primarily through our borrowing activities under our line of credit discussed in Item 7 of this report. A 1% increase in interest rates would result in an increase in annual interest expense of approximately $0.4 million, pre-tax, based upon the average daily balance during 2006. We do not use financial instruments for trading or other speculative purposes and are not a party to any derivative financial instruments.
At December 31, 2006, 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BioScrip, Inc. and subsidiaries at December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
BioScrip works with patients, physicians and pharmaceutical manufacturers. The Company also works directly with a variety of third party payors, including HMO’s, indemnity plans and PPO’s, health insurers and other insurance companies, as well as labor unions, self-funded employer groups and government agencies (including Medicaid and Medicare) (collectively “Plan Sponsors”), and through third-party administrators. The Company works with all of these constituents in a concerted effort to improve clinical and economic outcomes while enhancing the quality of life for the individuals living with chronic conditions.
The Company derives revenues by providing Specialty Services to patients who are chronically ill, genetically impaired, or afflicted with potentially life threatening diseases that require injection and infusion therapies, as well as infusion therapies and home healthcare services to patients recently discharged from hospitals. The Company also derives revenues from agreements to provide PBM Services, which include prescription Mail Service, to the Members of Plan Sponsors in the United States.
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 more than 30 specialty pharmacy locations across the United States.
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. The procedure for estimating the allowance for doubtful accounts requires significant judgment and assumptions. The risk of collection varies based upon the product, the payor (commercial health insurance, government, physician), the patient’s ability to pay the amounts not reimbursed by the payor and point of distribution (retail, national mail). The Company estimates the allowance for doubtful accounts based upon a variety of factors including the age of the outstanding receivables and the historical experience of collections, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The Company periodically reviews the estimation process and makes changes to the estimates as necessary. When it is deemed probable that a customer account is uncollectible, that balance is written off against the existing allowance.
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.
When prescriptions are filled in a Company owned pharmacy, the Company collects and retains co-payments or coinsurance from plan sponsors’ members and records these receipts as revenue when the amounts are collected or deemed collectible and reasonably estimable. In certain cases, the Company’s coordination of benefit support services result in the Company being unable to ascertain or estimate the amount of the co-payment or coinsurance until after the Company receives reimbursement and explanations of benefits from the payors. In those cases the Company collects those amounts after the fact. When prescriptions are filled through pharmacies participating in the Company’s retail pharmacy networks, the Company is not entitled to retain co-payments and accordingly does not account for retail pharmacy co-payments or coinsurance in its financial statements. Pharmacy network co-payments are never billed or collected by the Company and the Company has no legal right or obligation to receive them as they are collected by its network pharmacies.
In accordance with SFAS 142, Goodwill and Other Intangible Assets, 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. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The measurement of possible impairment is based upon the comparison of the fair value of each reporting unit with the book value of its assets.
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 years 2006 and 2005. In 2005, the fair value of PBM Services was less than its carrying amount, resulting in the write off of all goodwill associated with PBM Services, 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.
In September 2006, the FASB issued FASB Statement No. 157 (“FAS 157”) Fair Value Measurements. FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. A single definition of fair value, together with a framework for measuring fair value, should result in increased consistency and comparability in fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is evaluating the effect of FAS 157 on its financial statements.
On March 12, 2005 the Company acquired all of the issued and outstanding stock of Chronimed in a stock-for-stock transaction pursuant to which each share of Chronimed common stock was exchanged for 1.12 shares of the Company’s common stock. The results of operations of Chronimed are included in the Consolidated Statement of Operations beginning March 12, 2005. The acquisition of Chronimed added 28 specialty pharmacies throughout the U.S. to the Company’s existing pharmacies and Chronimed’s operations have been included in the Specialty Services segment. The acquisition has been accounted for in accordance with SFAS No. 141, Business Combinations, from the date of acquisition.
acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed,” was recognized and was consistent with the rationale for the acquisition as follows:
Portions of goodwill assigned to the Specialty Services segment are expected to be deductible for income tax purposes.
In 2005, the Company completed the process of rebranding to a single brand name, “BioScrip”. As a result the value of all legacy tradenames, totaling $5.8 million, was written off in the second quarter of 2005. A tradename acquired with the Chronimed purchase was valued at $0.4 million and fully amortized in 2005.
The Company leased one of its facilities from Alchemie Properties, LLC (“Alchemie”) pursuant to a ten-year agreement. Alchemie is controlled by Mr. E. David Corvese, a stockholder and former officer and director of the Company (the “Founder”). Rent expense was approximately $0.1 million for each of the years ended December 31, 2005 and 2004. With the relocation of the Company’s business headquarters to Eden Prairie, Minnesota, the Company bought out of the Alchemie lease on December 29, 2005 for approximately $0.2 million.
The U.S. Attorney’s Office in Boston and the Department of Justice informed the Company that its Chronimed Holdings, Inc. d/b/a StatScript Pharmacy (“StatScript) subsidiary, was named as a defendant in a qui tam law suit filed by a whistleblower against Serono, Inc., and several other defendants in the federal district court for the District of Massachusetts alleging claims under the federal False Claims Act. The complaint has not been served on the Company or StatScript, which has had limited access to parts of the complaint, which is filed under seal. The government settled the claims in the suit against Serono, Inc., and recently declined to intervene in that suit. The relator(s) who are entitled to proceed with the suit against the defendants, has not decided whether to proceed against Chronimed, StatScript or the other defendants.
On August 16, 2004, a shareholder of Chronimed, Inc., now a subsidiary of the Company, filed a purported class action lawsuit in the Minnesota state court (class certification was never accomplished), Hennepin County, naming Chronimed, Inc., and certain of its then officers and directors as defendants, who are represented by other law firms in the action. The plaintiff amended the complaint in December 2004 to add an additional plaintiff and BioScrip, Inc. (under the name MIM Corporation) as an additional defendant. The amended complaint asserts claims against the Chronimed officer and director defendants for alleged breach of their fiduciary duties in connection with the merger agreement by which the Company acquired Chronimed, alleges that the Company aided those alleged breaches, and seeks rescission of the merger and other relief. The amended complaint was never served on the Company, which has not responded to the pleading, appeared in the lawsuit, or been involved in any proceedings in the case. The court dismissed the amended complaint as against the other defendants and denied the
The future minimum lease payments under operating leases at December 31 are as follows (in thousands):
During 2006 the capital loss carryover expired, therefore the deferred tax asset and related valuation allowance for the capital loss carryover was removed.
Options granted under the Plans typically 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).
As a result of the adoption of SFAS 123(R) the Company now classifies cash flows from tax benefits in excess of the tax deductions of the compensation cost as financing cash inflows. Prior to the adoption of SFAS 123(R), the Company presented the tax benefit resulting from the exercise of stock options as a cash inflow from operating activities in the Statement of Cash Flows. Under the modified prospective method, prior periods are not restated to reflect adoption of SFAS 123(R).
Cash received from option exercises under share-based payment arrangements for the years ended December 31, 2006, 2005, and 2004, was $1.5 million, $1.8, million and $1.0 million, respectively.
Stock option activity for non-vested shares under the Plans through December 31, 2006 is as follows:
As of December 31, 2006, there was $2.9 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 2.3 years.
Services segment with a lesser amount in the Specialty Services segment
In the second quarter of 2005, the Company recorded a $3.5 million charge, net of tax, for the write-off of trade name intangibles relating to its re-branding strategy. In the fourth quarter of 2005, the Company recorded $18.2 million, net of tax, in goodwill and intangible impairment charges.
Allowance and reserve on balance sheet of Chronimed, acquired March, 12 2005, and Northland, acquired October 7, 2005.
As of the end of the period covered by this Annual Report, we evaluated the effectiveness of the design and operation of our disclosure controls. This evaluation was performed under the supervision and with the participation of management including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Disclosure controls are controls and procedures (as defined in the Exchange Act Rule 13d-15(e) and 15d-15(e)) designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
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 our disclosure controls as of December 31, 2006 were not effective as a result of a material weaknesses in information technology internal controls over financial reporting discussed in the following section below.
Based on management’s assessment of internal control over financial reporting as of December 31, 2006, we have identified and reported to our Audit Committee a material weakness in internal control over financial reporting related to information technology general controls. The material weakness is the result of the aggregation of control deficiencies in the following categories:
As a result of the material weakness described in the preceding paragraphs, our management believes that as of December 31, 2006, our internal control over financial reporting was not effective based on the COSO criteria. 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.
Support of strategic initiatives such as implementation of the new CAP program, and
Both of these priorities required significant IT resources. While some remediation of the IT general control deficiencies reported on in 2005 also occurred in 2006, we did not sufficiently remediate these deficiencies to reduce the aggregated deficiencies to a level below the material weakness threshold.
As noted above under Evaluation of Disclosure Controls and Procedures, we remediated the material weaknesses reported in 2005 Form 10-K related to accounts receivable and revenue recognition during 2006. Actions taken in the fourth quarter that are reasonably likely to have materially affected internal controls over financial reporting include:
Monthly reporting of and monitoring of cancelled claims for appropriate financial reporting;
Daily and weekly monitoring controls to evaluate and adjust revenues as coordination of benefits occurs during the life cycle of a claim.
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 weakness relating to information technology general controls has been identified and described in management’s assessment:
Ineffective controls over the documentation, testing, approval and migration of system changes to production environments; and
Lack of monitoring controls over personnel in the information technology function with update access to the production databases supporting significant applications.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 financial statements, and this report does not affect our report dated March 15, 2007 on those financial statements.
In our opinion, management’s assessment that BioScrip, Inc. did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, because of the effect of the material weakness 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, 2006, based on the COSO criteria.
Valuation and Qualifying Accounts for the years ended December 31, 2006, 2005 and 2004
Agreement and Plan of Merger, dated as of August 9, 2004, among MIM Corporation, Chronimed Acquisition Corp. and Chronimed Inc
Loan and Security Agreement, dated November 1, 2000, between MIM Funding LLC and HFG Healthco-4 LLC
Amendment No. 3, dated as of November 25, 2002, to the Receivables Purchase and Transfer Agreement, dated as of November 1, 2000, each of the parties named on Schedule I thereto, MIM Funding LLC and HFG Healthco-4 LLC
Letter Agreement, dated January 28, 2004, between the Company and Alfred Carfora
Employment offer letter, dated July 18, 2005, from the Company to Brian Reagan
First Amendment to Guarantee by the Company in favor of MIM Funding, LLC
Severance Letter Agreement, dated August 17, 2006, between BioScrip, Inc. and Brian Reagan
Severance Agreement, dated August 24, 2006, between BioScrip, Inc. and Barry A. Posner
Restated Employment Agreement, dated November 29, 2006, between BioScrip, Inc. and Richard H. Friedman
First Amendment, dated December 13, 2006, to the Amended and Restated Rights Agreement, dated as of December 3, 2002 (the “Rights Agreement”), between the Company and American Stock Transfer & Trust Company, as Rights Agent
Certification of Stanley G. Rosenbaum pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
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
Certification of Stanley G. Rosenbaum pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on August 9, 2004.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on January 5, 2005.
Incorporated by reference to the indicated exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.
Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 filed with the SEC on March 31, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, SEC Accession No. 0001089355-02-000248.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on December 1, 2004.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on March 2, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on June 1, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on June 22, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on August 10, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on August 25, 2006.
Incorporated by reference to the indicated exhibit to the Company’s Current Report on Form 8-K filed on December 14, 2006.
Chairman of the Board and Chief Executive Officer (principal executive officer)
Certification of Stanley G. Rosenbaum pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
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 regulations and contract negotiations occur frequently, necessitating the continual review and assessment of the estimation process.
Cost of revenue includes the costs of prescription medications, pharmacy claims, fees paid to pharmacies, shipping and other direct and indirect costs associated with pharmacy management and administration, claims processing operations and mail order services, offset by volume and prompt pay discounts received from pharmaceutical manufacturers and distributors and total manufacturer rebates.
The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets, including intangible assets, may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. Impairment losses, if any, would be determined based on the present value of the cash flows using discount rates that reflect the inherent risk of the underlying business. During 2005, the Company implemented a rebranding of all our business lines to a single brand name - “BioScrip.” As a result of that strategy the value of the trade names associated with our Natural Living, Inc. and Vitality Home Infusion Services, Inc. subsidiaries has been eliminated, and those assets have been removed from the balance sheet, resulting in a $5.8 million charge in the second quarter of 2005.
The Company’s financial instruments consist mainly of cash and cash equivalents and its line of credit. The carrying amounts of cash, cash equivalents and the line of credit approximate fair value due to their fully liquid or short-term nature.
Employee stock options and restricted stock awards of 485,751 and 546,292 for 2006 and 2005, respectively, were excluded from the diluted net income per share calculation because their effect would be anti-dilutive. Since 2006 and 2005 are in a net loss position, all outstanding employee stock options and restricted stock awards are excluded from the diluted net loss per share calculation.
The Company operates in two reportable segments: (1) Specialty Services, which is comprised of specialty pharmacy distribution and clinical management services; and (2) PBM Services, which is comprised of fully integrated pharmacy benefit management and traditional mail services.
The aggregate purchase price paid for Chronimed was $105.3 million including direct expenses of $3.7 million associated with the acquisition. The 14,380,551 shares of common stock exchanged and 2,612,146 stock options assumed in the acquisition were valued using the average market price of the Company’s common stock during the period beginning two days before and ending two days after the revised merger agreement was announced. The purchase price was allocated to the acquired assets and liabilities based on management’s estimates of their fair value and an independent valuation.
On February 2, 2004, the Company acquired all of the issued and outstanding stock of Natural Living, Inc., d/b/a Fair Pharmacy, a retail specialty pharmacy located in Bronx, New York for $15.0 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.
On October 7, 2005 the Company acquired all of the issued and outstanding stock of JPD, Inc. d/b/a Northland Medical Pharmacy (“Northland”), a community-based specialty pharmacy located in Columbus, Ohio for $12.0 million in cash. Northland complements the Company’s expanding community pharmacy model.
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, were closed as a result of these consolidations. These functions were fully transitioned to the Company’s Minnesota offices as of December 31, 2005.
In connection with the consolidation of the finance and IT departments as described above, throughout the second half of 2005, the Company terminated 67 employees. All of these terminations were the result of the purchase of Chronimed and were expensed in the Specialty Services segment. Severance costs in connection with this restructuring were recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), with the expense being allocated over the estimated retention period of employees. Severance costs of $2.0 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. All of these costs were recorded in the Specialty Services segment. All restructuring costs have been paid out as of December 31, 2006.
A non-compete agreement valued at $0.5 million was added for the Burbank acquisition in 2006. The Roslyn non-compete agreement of $0.7 million was fully amortized in 2006.
The amortization expense for the years ended December 31, 2006, 2005 and 2004 was $6.5 million, $6.4 million and $3.0 million, respectively. The estimated amortization expense for the next five years is as follows (in thousands):
One of the Company’s former board members, who resigned in February 2006, was a partner of the Company’s primary outside legal services firm. Fees were paid to that legal firm of $1.7 million, $2.1 million, and $1.1 million for the years ended December 31, 2006, 2005 and 2004, respectively.
On November 1, 2000 the Company entered into a $45 million revolving credit facility (the “Facility”) with an affiliate of Healthcare Finance Group, Inc. (“HFG”). The Facility had a three-year term, was secured by the Company’s receivables with interest paid monthly, and provided for borrowing up to $45 million at the London Inter-Bank Offered Rate (LIBOR) plus 2.1%.
as the result of cumulative operating losses incurred over the past two years the Company has recorded a valuation allowance against all of its deferred tax assets after utilization of the Company’s NOL carrybacks. The income tax provision for the year ended December 31, 2006 reflects the establishment of a valuation allowance of $25.7 million against deferred tax assets. Commencing in 2007, the Company will assess the continuing necessity for the valuation allowance. At such time as the Company determines that it is more likely than not that part or all of the deferred tax assets will be realized, the Company will reverse part or all of the valuation allowance.
As a result of adopting SFAS 123(R), the Company's loss from operations and net loss are $2.5 million greater than if the Company had continued to account for share-based compensation under APB 25. The following table illustrates the effect on net income and earnings per share had the Company applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option plans in all periods presented prior to adopting SFAS 123(R). For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing formula and is amortized to expense on a straight-line basis over the options’ vesting periods (in thousands, except per share amounts).
The maximum term of stock options under these plans is ten years. Options outstanding as of December 31, 2006 expire on various dates ranging from April 2008 through December 2016. The following table outlines our outstanding and exercisable stock options as of December 31, 2006:
Under the Plans, the Company’s Board of Directors may grant performance or other restricted stock awards to key employees. The Company’s Board of Directors may make the issuance of common stock subject to the satisfaction of one or more employment, performance goals or period, purchase or other conditions. During the year ending December 31, 2006, the Company issued restricted stock awards totaling 1,055,326 shares with a fair market value of $1.10 per share. The fair value of each stock award on the date of the grant was calculated by using a “Monte Carlo” valuation model and is amortized to expense on a straight line basis.
Under the Plans, the Company’s Board of Directors may grant performance units to key employees. The Company’s Board of Directors establishes the terms and conditions of the performance units including the performance goals, the performance period and the value for each performance unit. If the performance goals are satisfied, the Company shall pay the key employee an amount in cash equal to the value of each performance unit at the time of payment. In no event shall a key employee receive an amount in excess of $1.0 million in respect of performance units for any given year. As of December 31, 2006 there have been no performance units granted.
The Company maintains a deferred compensation plan under Section 401(k) of the Internal Revenue Code. Under the plan, employees may elect to defer up to 50% of their salary, subject to Internal Revenue Service limits. The Company may make a discretionary matching contribution. The Company recorded matching contributions in selling, general and administrative expenses of $0.5 million, $0.2 million and $0.2 million in each of the years ended December 31, 2006, 2005, and 2004, respectively.
A summary of quarterly financial information for fiscal 2006 and 2005 is as follows (in thousands except per share data):
In the fourth quarter of 2006, the Company recorded a $25.7 million income tax charge to establish a valuation allowance for deferred tax assets.
Amounts credited to the TennCareÒ reserve account and reductions in related liability accounts