NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1--
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BASIS OF PRESENTATION
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These Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements, including the notes thereto, and other information included in the Annual Report on Form 10-K of BioScrip, Inc. and its wholly-owned subsidiaries (the “Company”) for the year ended
December 31, 2013
(the “Annual Report”) filed with the U.S. Securities and Exchange Commission. These Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
The information furnished in these Unaudited Consolidated Financial Statements reflects all adjustments, including normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Operating results for the
three months
ended
March 31, 2014
are not necessarily indicative of the results that may be expected for the full year ended
December 31, 2014
. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 2 of the Audited Consolidated Financial Statements included in the Annual Report.
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
On March 31, 2014 the Company completed the sale of substantially all of its Home Health Services segment to LHC Group, Inc. (see Note 5 - Discontinued Operations). As a result of the sale of the Home Health Services segment, the Company operates in two operating and reportable segments, "Infusion Services" and "PBM Services". All prior period financial statements have been reclassified to include the Home Health Services segment as discontinued operations. In addition, other classification changes have been made which have no material effect on the Company's previously reported consolidated financial position, results of operations or cash flows.
As of
March 31, 2013
, the Company had an affiliate equity investment in a variable interest entity that developed a platform to facilitate the flow, management and sharing of vital health and medical information with stakeholders across the healthcare ecosystem. The Company's investment in this variable interest entity was recorded in the investments in and advances to unconsolidated affiliate line on the accompanying Consolidated Balance Sheets using the equity method of accounting.
On April 19, 2013, the Company, along with all other minority investors, completed the sale of its affiliate equity investment in this variable interest entity. At closing, the Company received a cash payment of
$8.5 million
, with an additional
$1.1 million
held in escrow. As of
March 31, 2014
, the unpaid escrow balance was
$0.7 million
. The Company also expects to receive additional services or cash from an existing guarantee during the
two
years following close. The terms of the services to be provided or the cash guarantee to be paid will be determined by the Company and the parties involved in the sale. As of
March 31, 2014
, a receivable of
$2.1 million
is included in other non-current assets in the accompanying Consolidated Balance Sheets.
In July 2013, the FASB issued ASU 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
(“ASU 2013-11”). ASU 2013-11 provides that a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In that case, the liability associated with the unrecognized tax benefit is presented in the financial statements as a reduction to the related deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. In situations in which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of the jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with deferred tax assets. The Company adopted ASU 2013-11 effective January 1, 2014 with no material impact on its Consolidated Financial Statements.
The Company has evaluated events that occurred during the period subsequent to the balance sheet date through the filing date of this Form 10-Q. See Note 9 - Commitments and Contingencies for additional information.
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NOTE 2--
|
EARNINGS PER SHARE
|
Income (Loss) Per Share
The following table sets forth the computation of basic and diluted income (loss) per common share (in thousands, except for per share amounts):
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|
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|
|
|
|
|
|
|
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Three Months Ended
March 31,
|
|
|
2014
|
|
2013
|
Numerator:
|
|
|
|
|
Loss from continuing operations, net of income taxes
|
|
$
|
(25,422
|
)
|
|
$
|
(8,441
|
)
|
Income from discontinued operations, net of income taxes
|
|
108
|
|
|
313
|
|
Net loss
|
|
$
|
(25,314
|
)
|
|
$
|
(8,128
|
)
|
|
|
|
|
|
Denominator - Basic and Diluted:
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
68,171
|
|
|
57,047
|
|
|
|
|
|
|
Loss from continuing operations, basic and diluted
|
|
$
|
(0.37
|
)
|
|
$
|
(0.15
|
)
|
Income from discontinued operations, basic and diluted
|
|
—
|
|
|
0.01
|
|
Loss per common share, basic and diluted
|
|
$
|
(0.37
|
)
|
|
$
|
(0.14
|
)
|
Accounting Standards Codification ("ASC") Topic 260,
Earnings Per Share
, requires that income from continuing operations be used as the basis of determining whether the inclusion of common stock equivalents would be anti-dilutive. Accordingly, the computation of diluted shares for the
three months
ended
March 31, 2014
and
2013
excludes the effect of the Company's
3.1 million
common stock purchase warrants with an exercise price of
$10
issued in connection with the acquisition of Critical Homecare Solutions Holdings, Inc. ("CHS") in 2010 as their inclusion would be anti-dilutive to earnings per common share from continuing operations. In addition to the warrants, the computation of diluted shares for the
three months
ended
March 31, 2014
and
2013
excludes the effect of
3.8 million
and
6.5 million
shares, respectively, of other common stock equivalents as their inclusion would be anti-dilutive to earnings per common share from continuing operations.
NOTE 3--ACQUISITIONS
CarePoint Partners Holdings LLC
On August 23, 2013, the Company closed on the acquisition of substantially all of the assets and assumption of certain liabilities that constituted the home infusion business (the “CarePoint Business”) of CarePoint Partners Holdings LLC, a Delaware limited liability company, and its subsidiaries (collectively "CarePoint"). CarePoint was a provider of home and alternate-site infusion therapy for patients with complex, acute and chronic illnesses. CarePoint serviced approximately
20,500
patients annually through
28
sites of service in
nine
states in the East Coast and Gulf Coast regions.
The total consideration to the sellers at closing was
$211.1 million
paid in cash plus contingent consideration of
$10.0 million
. The sellers of the CarePoint Business will be eligible to receive the contingent consideration if the CarePoint Business achieves a specified level of product gross profit during the one-year period following the closing date. If the specified level of product gross profit is not achieved, no contingent consideration will be due to the sellers. Subsequent to the closing, the Company identified additional net working capital adjustments of approximately
$2.2 million
primarily related to the value of accounts receivable and prepaid expenses as of the date of acquisition and has requested payment from the sellers. The
$2.2 million
amount due from CarePoint is included in prepaid expenses and other current assets on the accompanying Consolidated Balance Sheets and is reflected in the estimated fair values below.
At the date of acquisition, the fair value of the
$10.0 million
contingent consideration was estimated at
$9.8 million
. The fair value of the contingent consideration was determined using Level 3 inputs based on the present value of various payout scenarios, weighted on the basis of probability. At
March 31, 2014
, the fair value of the contingent consideration was remeasured at fair value using the actual operating results during 2013 and 2014 and forecasted operating results for the remainder of 2014 of the CarePoint Business. As a result of this remeasurement, the fair value of the contingent consideration was reduced to
$8.9 million
and is included in accrued expenses and other current liabilities in the accompanying Unaudited Consolidated Balance Sheets. The Company believes there is a high probability that the required product gross profit will be attained because current forecasts exceed by a narrow margin the threshold required. However there is risk in the realization of the contractual amounts recorded in accounts receivable and in the growth targets in some large markets so the probability of attaining the required threshold is not 100%. Should the sellers of the CarePoint business earn the contingent consideration during the twelve month measurement period ending August 31, 2014, an additional expense of
$1.1 million
will be recorded over and above the accrual of
$8.9 million
estimated as of March 31, 2014. The
$0.9 million
of income resulting from the reduction of the fair value of the contingent consideration is included in the change in fair value of contingent consideration in the accompanying Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2014
.
The Company funded the cash payment at closing with a combination of cash on hand and
$150.0 million
in borrowings under the Senior Credit Facilities (see Note 9 - Debt).
The table below summarizes the Company's current assessment of the estimated fair values of the assets acquired and liabilities assumed as of the date of closing of the acquisition of the CarePoint Business. The Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the date of the closing may result in retrospective adjustments to the provisional amounts recognized. These changes could be significant. The Company will finalize these amounts no later than one year from the acquisition date.
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Estimated Fair Value
(in thousands)
|
Cash
|
$
|
14
|
|
Accounts receivable
|
$
|
16,644
|
|
Inventories
|
3,263
|
|
Other current assets
|
272
|
|
Property and equipment
|
3,266
|
|
Identifiable intangible assets
(1)
|
16,700
|
|
Current liabilities
|
(8,521
|
)
|
Non-current liabilities
|
(721
|
)
|
Total identifiable net assets
|
30,917
|
|
Goodwill
|
187,721
|
|
Total cash and fair value of contingent consideration
|
$
|
218,638
|
|
|
|
(1)
|
The following table summarizes the provisional amounts and useful lives assigned to identifiable intangible assets:
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|
|
|
|
|
|
|
|
Weighted-
Average
Useful Lives
|
|
Amounts
Recognized as of the Closing Date
(in thousands)
|
Customer relationships
|
2 - 4 years
|
|
$
|
13,600
|
|
Trademarks
|
2 years
|
|
2,600
|
|
Non-compete agreements
|
5 years
|
|
500
|
|
Total identifiable intangible assets acquired
|
|
|
$
|
16,700
|
|
The excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition was allocated to goodwill. The value of goodwill represents the value the Company expects to be created by combining the various operations of the CarePoint Business with the Company's operations, including the expansion into new infusion markets, the opportunity to consolidate and upgrade certain existing facilities, access to new patients and potential cost savings and synergies. The CarePoint transaction was structured such that the amount allocated to goodwill will be deductible for income tax purposes.
The accompanying Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2014
include revenues and loss from continuing operations of the CarePoint Business of
$40.0 million
and
$0.3 million
, respectively .
HomeChoice Partners, Inc.
On February 1, 2013, the Company acquired
100%
of the ownership interest in HomeChoice Partners, Inc., a Delaware corporation ("HomeChoice"). Prior to the Company's acquisition, HomeChoice was a provider of alternate-site infusion pharmacy services that serviced approximately
15,000
patients annually and had
14
infusion pharmacy locations in Pennsylvania; Washington, DC; Maryland; Virginia; North Carolina; South Carolina; Georgia; Missouri; and Alabama.
The cash purchase price of the HomeChoice acquisition was
$72.9 million
paid at the closing date. In addition, the purchase agreement provided that the purchase price could be increased by contingent consideration of up to
$20.0 million
if HomeChoice were to attain certain performance milestones in the
two
years following the closing.
At the date of acquisition, the fair value of the potential contingent consideration, using Level 3 inputs, was estimated at
$8.0 million
. The
$20.0 million
maximum contingent consideration was established using aggressive growth targets meant to achieve operating results in excess of transaction valuation model assumptions. Given the aggressiveness of the earnout target threshold, the Company assigned less than 50% probability of payout among the various payout scenarios considered.
While the acquisition has generated revenues as expected in the transaction valuation model, revenues through
March 31, 2014
have not exceeded the aggressive earnout performance pace required. Specifically, revenue generating opportunities through various potential business relationships have not come to fruition and thus the probability of attaining the high level of growth required to achieve the earnout has been diminishing over the past year resulting in a lower probability of a future payout of contingent consideration. At
March 31, 2014
, the fair value of the contingent consideration was again remeasured at fair value using actual operating results through
March 31, 2014
and forecasted operating results for the remainder of
2014
. As a result of this remeasurement, the fair value of the contingent consideration was reduced to
$0.8 million
, and is included in other non-current liabilities in the accompanying Unaudited Consolidated Balance Sheets. The
$1.4 million
of income resulting from the reduction in the fair value of the contingent liability is included in change in fair value of contingent consideration in the accompanying Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2014
.
The accompanying Unaudited Consolidated Statements of Operations include revenues of
$21.1 million
and
$10.8 million
and income (loss) from continuing operations of
$3.7 million
, and
$(0.8) million
related to HomeChoice for the
three months ended March 31, 2014
and for the period from the date of acquisition to
March 31, 2013
, respectively.
InfuScience, Inc.
On July 31, 2012, the Company acquired
100%
of InfuScience, Inc. (“InfuScience”) for a cash payment of
$38.3 million
. The purchase price could increase up to an additional
$3.0 million
based on the results of operations during the
24
month period through July 31, 2014. InfuScience historically acquired, developed and operated businesses providing alternate site infusion pharmacy services through
five
infusion centers located in Eagan, Minnesota; Omaha, Nebraska; Chantilly, Virginia; Charleston, South Carolina; and Savannah, Georgia.
As of December 31, 2013, the total fair value of the potential contingent consideration, determined using Level 3 inputs based on the present value of various payout scenarios and weighted on the basis of probability, was estimated at
$3.0 million
. As of
March 31, 2014
, the Company has made contingent payments of
$2.0 million
based on the achievement of expected operating results. At
March 31, 2014
, the fair value of the remaining
$1.0 million
contingent liability was remeasured at fair value using actual operating results, forecasted operating results for the remainder of 2014 and payments made through
March 31, 2014
to adjust the present value and probability of the various payout scenarios. As a result of this remeasurement, the fair value of the contingent payment was not adjusted and is included in accrued expenses and other current liabilities in the accompanying Unaudited Consolidated Balance Sheets.
Acquisition and Integration Costs
Acquisition and integration expenses in the accompanying Consolidated Statements of Operations for
three months ended March 31, 2014
and
2013
include the following costs related to the CarePoint Business, HomeChoice Partners, and InfuScience acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Legal, financial advisory and professional fees
|
$
|
975
|
|
|
$
|
1,010
|
|
Employee costs including redundant salaries and benefits and severance
|
1,150
|
|
|
1,135
|
|
Facilities consolidation and discontinuation
|
305
|
|
|
159
|
|
Bad debt expense related to acquired accounts receivable
|
3,302
|
|
|
—
|
|
Legal settlement
|
325
|
|
|
2,300
|
|
Other
|
442
|
|
|
19
|
|
Total
|
$
|
6,499
|
|
|
$
|
4,623
|
|
Bad debt expense associated with acquisition and integration cost pertains to accounts receivable balances acquired in connection with the CarePoint Business and HomeChoice acquisitions that are no longer deemed collectible. These acquired accounts receivable were reserved at historical collection rates as of December 31, 2013. Based on lower than expected collections in the first quarter of 2014, the Company no longer expects to achieve historical collection rates on the acquired accounts receivable.
Pro Forma Impact of Acquisitions
The following shows summarized unaudited pro forma consolidated results of operations for the
three months
ended
March 31, 2014
and
2013
as if the CarePoint and HomeChoice acquisitions had occurred as of January 1, 2013 (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Revenues
|
$
|
239,643
|
|
|
$
|
225,560
|
|
Loss from continuing operations, net of income taxes
|
$
|
(25,422
|
)
|
|
$
|
(8,524
|
)
|
Basic loss per share from continuing operations
|
$
|
(0.37
|
)
|
|
$
|
(0.15
|
)
|
Diluted loss per share from continuing operations
|
$
|
(0.37
|
)
|
|
$
|
(0.15
|
)
|
The unaudited pro forma consolidated results of operations were prepared using the acquisition method of accounting and are based on the historical financial information of the Company, CarePoint and HomeChoice. Except to the extent realized in the
three months
ended
March 31, 2014
, the unaudited pro forma information does not reflect any cost savings, operating synergies and other benefits that the Company may achieve as a result of these acquisitions, or the expenses to be incurred to achieve these savings, operating synergies and other benefits. In addition, except to the extent recognized in the
three months ended March 31, 2014
, the unaudited pro forma information does not reflect the costs to integrate the operations of the Company with CarePoint or HomeChoice.
The unaudited pro forma information is not necessarily indicative of what the Company's consolidated results of operations actually would have been had the CarePoint and HomeChoice acquisitions been completed on January 1, 2013. In addition, the unaudited pro forma information does not purport to project the future results of operations of the Company. The unaudited pro forma information primarily reflects the following adjustments to the historical results of the acquired entities prior to acquisition (in thousands):
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|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Interest expense
|
$
|
—
|
|
|
$
|
504
|
|
Amortization expense
|
$
|
—
|
|
|
$
|
(600
|
)
|
Income tax benefit (expense)
|
$
|
—
|
|
|
$
|
(1,285
|
)
|
Expenses incurred to integrate acquisitions are recorded in acquisition and integration expenses of the Unaudited Consolidated Statements of Operations. These costs include legal and financial advisory fees associated with acquisitions and integration costs to convert to common policies, procedures, and information systems.
NOTE 4--DISCONTINUED OPERATIONS
Sale of Home Health Business
On March 31, 2014, the Company completed the sale of substantially all of the Company’s Home Health Services segment (the “Home Health Business”) pursuant to the Stock Purchase Agreement dated as of February 1, 2014 (the “Stock Purchase Agreement”), as amended, by and among LHC Group, Inc., a Delaware corporation, and certain of its subsidiaries (collectively, the “Buyer”) and the Company and Elk Valley Professional Affiliates, Inc. (“EVPA”), South Mississippi Home Health, Inc. (“SMHH”), and Deaconess Homecare, LLC (collectively the “Seller”). The Buyer agreed to acquire the Home Health Business, consisting of (1) all of the issued and outstanding shares of capital stock of EVPA owned by the Seller, (2) all of the issued and outstanding shares of capital stock of SMHH owned by the Seller, and (3) all of the issued and outstanding membership interests in two limited liability companies (collectively, the “Holding Newcos” and, together with EVPA and SMHH, the “Subject Companies”) that were wholly-owned subsidiaries of the Seller, formed for the purpose of the sale to hold indirectly the Seller’s other assets and operating liabilities related to the operation of the Home Health Business. On the closing date, the Company also entered into an Amendment No. 1 (the “Amendment”) to the Stock Purchase Agreement in connection with the closing. The Amendment modified the Stock Purchase Agreement to (i) exclude from the home health business conducted by the Company at one of its locations, and (ii) reduce by
$0.5 million
the total consideration to be received by the Company, to approximately
$59.5 million
.
Pursuant to the terms of the Stock Purchase Agreement, as amended, the Company received total consideration of approximately
$59.5 million
paid in cash (the “Purchase Price”). The Company used a portion of the net proceeds from the sale to pay down a portion of the Company’s outstanding debt. The Purchase Price is subject to adjustment for net working capital of the Subject Companies as of the closing date.
The sale of the Home Health Business is consistent with the Company’s continuing strategic evaluation of its non-core businesses and its decision to continue to focus growth initiatives and capital in the Infusion Services segment.
On
March 31, 2014
, the carrying value of the net assets of the Subject Companies was as follows (in thousands):
|
|
|
|
|
|
|
|
Carrying Value
|
Net accounts receivable
|
|
$
|
12,597
|
|
Prepaid expenses and other current assets
|
|
242
|
|
Total current assets
|
|
12,839
|
|
Property and equipment, net
|
|
402
|
|
Goodwill
|
|
33,784
|
|
Intangible assets
|
|
15,400
|
|
Other non-current assets
|
|
28
|
|
Total assets
|
|
62,453
|
|
Accounts payable
|
|
673
|
|
Amounts due to plan sponsors
|
|
229
|
|
Accrued expenses and other current liabilities
|
|
3,008
|
|
Total liabilities
|
|
3,910
|
|
Net assets
|
|
$
|
58,543
|
|
The carrying value of the net assets of the Subject Companies above is subject to adjustment for net working capital as defined in the Stock Purchase Agreement. The estimated pre-tax gain on sale of the Home Health Business is approximately
$1.0 million
based on the
March 31, 2014
net asset balances above and before broker's fees, legal expenses and other one-time transactions costs. The net assets of the Subject Companies have been reclassified to discontinued operations for all prior periods in the accompanying unaudited consolidated financial statements.
The operating results included in discontinued operations of the Home Health Business for the
three months ended March 31, 2014
and
2013
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2014
|
|
2013
|
Revenue
|
|
$
|
17,541
|
|
|
$
|
17,942
|
|
Gross profit
|
|
$
|
6,739
|
|
|
$
|
7,255
|
|
Selling, general and administrative expenses
|
|
6,589
|
|
|
5,785
|
|
Bad debt expense
|
|
658
|
|
|
217
|
|
Income (loss) from operations
|
|
(508
|
)
|
|
1,253
|
|
Gain on sale before income taxes
|
|
995
|
|
|
—
|
|
Broker's fee and legal expenses
|
|
2,875
|
|
|
—
|
|
Impairment of assets
|
|
452
|
|
|
—
|
|
Other costs and expenses
|
|
47
|
|
|
—
|
|
Income (loss) before income taxes
|
|
(2,887
|
)
|
|
1,253
|
|
Income tax expense (benefit)
|
|
(3,832
|
)
|
|
519
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
945
|
|
|
$
|
734
|
|
Pharmacy Services Asset Sale
On February 1, 2012, the Company entered into a Community Pharmacy and Mail Business Purchase Agreement (the “2012 Asset Purchase Agreement”) by and among Walgreen Co. and certain subsidiaries (collectively, the "Buyers") and the Company and certain subsidiaries (collectively, the "Sellers") with respect to the sale of certain assets, rights and properties (the “Pharmacy Services Asset Sale”) relating to the Sellers' traditional and specialty pharmacy mail operations and community retail pharmacy stores.
Pursuant to the terms of the 2012 Asset Purchase Agreement, the Company received a total purchase price of approximately
$173.8 million
. As a result of the Pharmacy Services Asset Sale, the Company has recognized a total pretax gain of
$108.1 million
, net of transaction costs and other one-time charges as a result of the transaction.
The purchase price excluded all accounts receivable and working capital liabilities related to the operations subject to the Pharmacy Services Asset Sale, which were retained by the Company. No amounts related to the net accounts receivable retained by the Company remained at
December 31, 2013
.
The transaction included the sale of
27
community pharmacy locations, and certain assets of three community pharmacy locations, and three traditional and specialty mail service operations, which constituted all of the Company's operations in the community pharmacy and mail order lines of business. As a result of the divestiture process, the Company assessed its continuing operations in order to align its corporate structure with its remaining operations. As part of these efforts, the Company has incurred and expects to continue to incur additional expenses that may impact the Company's future consolidated financial statements. These additional costs, including employee severance and other benefit-related costs, facility-related costs, and other one-time charges are included in income (loss) from discontinued operations, net of income taxes in the Consolidated Statements of Operations.
The operating results of the divested traditional and specialty pharmacy mail operations and community pharmacies included in discontinued operations for the
three months ended March 31, 2014
and
2013
, are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2014
|
|
2013
|
Revenue
|
|
$
|
—
|
|
|
$
|
(20
|
)
|
Gross profit
|
|
$
|
(27
|
)
|
|
$
|
(68
|
)
|
Operating expenses
|
|
810
|
|
|
619
|
|
Interest (income) expense
|
|
—
|
|
|
(28
|
)
|
Income tax expense
|
|
—
|
|
|
(238
|
)
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
(837
|
)
|
|
$
|
(421
|
)
|
Operating expenses during the
three months ended March 31, 2014
primarily consist of legal fees related to the legal proceedings discussed in Note 9 - Commitments and Contingencies.
Effective January 8, 2014, the Company entered into a Stipulation and Order of Settlement and Dismissal (the “Federal Settlement Agreement”) with the U.S. Department of Justice (the “DOJ”) and a
qui tam
relator (the “Relator”). The Federal Settlement Agreement represented the federal and private component of an agreement in principle to settle all civil claims under the False Claims Act and related statutes and all common law claims that could have been brought by the DOJ and Relator that arose out of the distribution of the Novartis Pharmaceutical Corporation’s product
Exjade®
(the “Medication”) by the Company's traditional and specialty pharmacy mail operations and community retail pharmacy stores prior to its divestiture in May 2012. Further, effective February 11, 2014, the Company entered into State Settlement Agreements with the offices of the Attorneys General of thirty-five states (the "Settling States"). The State Settlement Agreements represented the state component of the Company's agreement in principle to settle the claims that could have been brought by the Settling States that arose out of the distribution of the Medication. During the year ended December 31, 2013, the Company accrued
$15.0 million
related to the Settlement Agreements and included the amount and related legal fees and expenses in income (loss) from discontinued operations, net of income taxes in the Consolidated Statements of Operations (see Note 10 - Commitments and Contingencies).
As of
March 31, 2014
and
December 31, 2013
, there were accruals of
$12.7 million
and
$16.3 million
, respectively, related to these costs in accrued expenses and other current liabilities and other non-current liabilities on the Unaudited Consolidated Balance Sheets. The accrual activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Settlement
|
|
Employee Severance
and Other Benefits
|
|
Other Costs
|
|
Total
|
Balance at December 31, 2013
|
|
$
|
15,000
|
|
|
$
|
92
|
|
|
$
|
1,195
|
|
|
$
|
16,287
|
|
Expenses
|
|
14
|
|
|
—
|
|
|
975
|
|
|
989
|
|
Cash payments
|
|
(3,014
|
)
|
|
(92
|
)
|
|
(1,321
|
)
|
|
(4,427
|
)
|
Non-cash charges and adjustments
|
|
—
|
|
|
—
|
|
|
(152
|
)
|
|
(152
|
)
|
Balance at March 31, 2014
|
|
$
|
12,000
|
|
|
$
|
—
|
|
|
$
|
697
|
|
|
$
|
12,697
|
|
NOTE 5--GOODWILL AND INTANGIBLE ASSETS
Goodwill consisted of the following as of
March 31, 2014
and
December 31, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
Infusion
|
$
|
559,086
|
|
|
$
|
558,593
|
|
PBM Services
|
12,744
|
|
|
12,744
|
|
Total
|
$
|
571,830
|
|
|
$
|
571,337
|
|
At
December 31, 2013
, goodwill of
$33.8 million
related to the Home Health Business sold on March 31, 2014 is included in non-current assets of discontinued operations in the accompanying consolidated balance sheet (see Note 5 - Discontinued Operations). The increase in the Infusion Services segment goodwill results from purchase price adjustments related to the CarePoint Business acquisition.
In accordance with ASC 350,
Intangibles--Goodwill and Other
, the Company evaluates goodwill for impairment on an annual basis and whenever events or circumstances exist that indicate that the carrying value of goodwill may no longer be recoverable. The impairment evaluation is 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 first step indicates that the fair value of the reporting unit is less than its carrying amount, the second step must be performed which determines the implied fair value of reporting unit goodwill. The measurement of possible impairment is based upon the comparison of the implied fair value of reporting unit to its carrying value.
The Company will evaluate goodwill for possible impairment during the quarter ending
December 31, 2014
unless an interim goodwill impairment test is required.
Intangible assets consisted of the following as of
March 31, 2014
and
December 31, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
December 31, 2013
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Infusion customer relationships
|
|
$
|
25,650
|
|
|
$
|
(13,202
|
)
|
|
$
|
12,448
|
|
|
$
|
25,650
|
|
|
$
|
(12,062
|
)
|
|
$
|
13,588
|
|
Infusion trademarks
|
|
6,200
|
|
|
(3,969
|
)
|
|
2,231
|
|
|
6,200
|
|
|
(3,514
|
)
|
|
2,686
|
|
Non-compete agreements
|
|
1,500
|
|
|
(1,058
|
)
|
|
442
|
|
|
1,500
|
|
|
(950
|
)
|
|
550
|
|
|
|
$
|
33,350
|
|
|
$
|
(18,229
|
)
|
|
$
|
15,121
|
|
|
$
|
33,350
|
|
|
$
|
(16,526
|
)
|
|
$
|
16,824
|
|
Intangible assets are amortized on a straight-line basis over their estimated useful lives as follows:
|
|
|
|
Estimated Useful Life
|
Infusion customer relationships
|
5 months - 4 years
|
Infusion trademarks
|
23 months - 3 years
|
Non-compete agreements
|
1 to 5 years
|
At December 31, 2013, intangible assets of
$15.4 million
related to the Home Health Business sold on March 31, 2014 are included in non-current assets of discontinued operations in the accompanying consolidated balance sheet at December 31, 2013 (see Note 5 - Discontinued Operations).
The estimated fair value of intangible assets was calculated using level 3 inputs based on the present value of anticipated future benefits. Total amortization of intangible assets was
$1.7 million
and
$2.1 million
for the
three months ended March 31, 2014
and
2013
, respectively. Future amortization expense is anticipated to be as follows (in thousands):
|
|
|
|
|
2014 (nine months)
|
$
|
4,860
|
|
2015
|
5,318
|
|
2016
|
3,078
|
|
2017
|
1,799
|
|
2018 and beyond
|
66
|
|
Total
|
$
|
15,121
|
|
NOTE 6--RESTRUCTURING AND OTHER EXPENSES
Restructuring and other expenses include expenses resulting from the execution of our strategic assessment and related restructuring plans, consisting primarily of employee severance and other benefit-related costs, third-party consulting costs, facility-
related costs, and certain other costs. It also includes other transitional costs such as training, redundant salaries, and retention bonuses for certain critical personnel.
In the fourth quarter of 2010, the Company commenced a strategic assessment of its business and operations ("Restructuring Phase I"). This assessment focused on expanding revenue opportunities and lowering corporate overhead, including workforce and benefit reductions and facility rationalization. In addition to addressing corporate overhead, the strategic assessment examined the Company's market strengths and opportunities and compared the Company's position to that of its competitors. As a result of the assessment, the Company focused its growth on investments in the Infusion and Home Health Services segments and elected to pursue offers for its traditional and specialty pharmacy mail operations and community pharmacy stores. Accordingly, the Company consummated the Pharmacy Services Asset Sale relating to its traditional and specialty pharmacy mail operations and community retail pharmacy stores. During the three months ended June 30, 2012, as a result of the divestiture process, the Company's management team commenced an assessment of the Company's continuing operations in order to align its corporate structure with its remaining operations ("Restructuring Phase II"). Restructuring Phase II is continuing as the Company divests other businesses and adjusts the Company's overhead expenses to support the Infusion Services segment.
The Company anticipates that additional restructuring will occur and thus significant additional charges such as the write down of certain long−lived assets, employee severance, other restructuring type charges, temporary redundant expenses, potential cash bonus payments and potential accelerated payments or termination costs for certain of its contractual obligations, could impact the Company's future Consolidated Financial Statements.
Restructuring Phase I
As a result of Restructuring Phase I, the Company incurred restructuring expenses of approximately
$62 thousand
related to facility-related costs during the
three months ended March 31, 2014
. The Company did not incur any significant restructuring expenses related to Phase I during the
three months ended March 31, 2013
, although some amounts previously accrued were adjusted.
Since inception of Restructuring Phase I, the Company has incurred approximately
$10.1 million
in total Phase I expenses, consisting of
$4.3 million
of third-party consulting costs,
$4.1 million
of employee severance and other benefit-related costs related to workforce reductions, and
$1.7 million
of facility-related costs.
The restructuring costs are included in restructuring and other expenses in the Unaudited Consolidated Statements of Operations and as part of the calculation of Segment Adjusted EBITDA, as defined in Note 11. As of
March 31, 2014
, there are restructuring accruals of
$0.5 million
related to Phase I included in accrued expenses and other current liabilities and other non-current liabilities on the Unaudited Consolidated Balance Sheets. The restructuring accrual activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Facility-Related Costs
|
|
Total
|
Balance at December 31, 2013
|
|
$
|
521
|
|
|
$
|
521
|
|
Expenses
|
|
62
|
|
|
62
|
|
Cash payments
|
|
(109
|
)
|
|
(109
|
)
|
Balance at March 31, 2014
|
|
$
|
474
|
|
|
$
|
474
|
|
Restructuring Phase II
As a result of Restructuring Phase II, the Company incurred restructuring expenses of approximately
$3.9 million
and
$0.5 million
during
three months ended March 31, 2014
and
2013
, respectively. Restructuring expenses for the
three months ended March 31, 2014
included approximately
$1.0 million
of employee severance and other benefit-related costs related to workforce reductions and
$2.9 million
in third party consulting costs.
Since inception of Phase II of restructuring, the Company has incurred approximately
$9.2 million
in total expenses, consisting of
$3.6 million
of employee severance and other benefit-related costs related to workforce reductions,
$4.7 million
in third party consulting costs and
$0.9 million
of other costs.
The restructuring costs are included in restructuring and other expenses on the Unaudited Consolidated Statements of Operations and as part of the calculation of Segment Adjusted EBITDA, as defined in Note 11. As of
March 31, 2014
, there are
restructuring accruals of
$4.2 million
related to Phase II included in accrued expenses and other current liabilities and other non-current liabilities on the Unaudited Consolidated Balance Sheets. The restructuring accrual activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance
and Other Benefits
|
|
Consulting
Costs
|
|
Other Costs
|
|
Total
|
Balance at December 31, 2013
|
|
$
|
896
|
|
|
$
|
1,551
|
|
|
$
|
33
|
|
|
$
|
2,480
|
|
Expenses
|
|
991
|
|
|
2,871
|
|
|
4
|
|
|
3,866
|
|
Cash payments
|
|
(605
|
)
|
|
(1,551
|
)
|
|
(4
|
)
|
|
(2,160
|
)
|
Balance at March 31, 2014
|
|
$
|
1,282
|
|
|
$
|
2,871
|
|
|
$
|
33
|
|
|
$
|
4,186
|
|
Other expenses include training and transitional costs, redundant salaries, certain fees associated with the Pharmacy Services Asset Sale and the sale of its Home Health Business and the Company's equity in the net loss of its unconsolidated affiliate. Other expenses totaled
$0.7 million
and
$0.8 million
for the
three months ended March 31, 2014
and
2013
, respectively.
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
Computer and office equipment, including equipment acquired under capital leases
|
$
|
22,777
|
|
|
$
|
19,961
|
|
Software capitalized for internal use
|
14,918
|
|
|
13,746
|
|
Vehicles, including equipment acquired under capital leases
|
2,132
|
|
|
2,056
|
|
Medical equipment
|
24,793
|
|
|
22,247
|
|
Work in progress
|
3,530
|
|
|
8,815
|
|
Furniture and fixtures
|
4,424
|
|
|
4,291
|
|
Leasehold improvements
|
12,379
|
|
|
12,082
|
|
|
84,953
|
|
|
83,198
|
|
Less: Accumulated depreciation
|
(45,000
|
)
|
|
(42,016
|
)
|
Property and equipment, net
|
$
|
39,953
|
|
|
$
|
41,182
|
|
The Company had an insignificant amount of vehicles under capital lease as of
March 31, 2014
and
December 31, 2013
.
Depreciation Expense
Depreciation expense, including expense related to assets under capital lease, was
$3.8 million
and
$2.4 million
for the
three months ended March 31, 2014
and
2013
, respectively. Depreciation expense includes costs related to software capitalized for internal use of
$0.5 million
and
$0.4 million
for the
three months ended March 31, 2014
and
2013
, respectively.
NOTE 8--DEBT
As of
March 31, 2014
and
December 31, 2013
, the Company’s debt consisted of the following obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
Revolving Credit Facility
|
$
|
—
|
|
|
$
|
40,003
|
|
Term Loan Facilities
|
222,757
|
|
|
395,000
|
|
2021 Notes
|
195,066
|
|
|
—
|
|
Capital leases
|
846
|
|
|
576
|
|
Total Debt
|
418,669
|
|
|
435,579
|
|
Less: Current portion
|
431
|
|
|
60,257
|
|
Long-term debt, net of current portion
|
$
|
418,238
|
|
|
$
|
375,322
|
|
Senior Credit Facilities
On July 31, 2013, the Company entered into (i) a senior secured first-lien revolving credit facility in an aggregate principal amount of
$75.0 million
(the “Revolving Credit Facility”), (ii) a senior secured first-lien term loan B in an aggregate principal amount of
$250.0 million
(the “Term Loan B Facility”) and (iii) a senior secured first-lien delayed draw term loan B in an aggregate principal amount of
$150.0 million
(the “Delayed Draw Term Loan Facility” and, together with the Revolving Credit Facility and the Term Loan B Facility, the “Senior Credit Facilities”) with SunTrust Bank, Jefferies Finance LLC and Morgan Stanley Senior Funding, Inc.
On December 23, 2013, the Company entered into the First Amendment to the Senior Credit Facilities pursuant to which the Company obtained the required consent of the lenders to enter into the Settlement Agreements (see Note 10 - Commitments and Contingencies) and to begin making payments, in accordance with the payment terms, on the settlement amount of
$15.0 million
.
On January 31, 2014, the Company entered into the Second Amendment to the Senior Credit Facilities, which, among other things (i) provides additional flexibility with respect to compliance with the maximum net leverage ratio for the fiscal quarters
ending December 31, 2013 through and including December 31, 2014, (ii) provides additional flexibility under the indebtedness covenants to permit the Company to obtain up to
$150.0 million
of second-lien debt and issue up to
$250.0 million
of unsecured bonds, provided that
100%
of the net proceeds are applied first to the Revolving Credit Facility, with no corresponding permanent commitment reduction, and then to the Term Loan B Facility, (iii) provides the requisite flexibility to sell non-core assets, subject to the satisfaction of certain conditions, and (iv) increased the applicable interest rates for the Term Loan B Facility and the Delayed Draw Term Loan Facility (collectively, the "Term Loan Facilities") to the Eurodollar rate plus
6.00%
or the base rate plus
5.00%
, until the occurrence of certain pricing decrease triggering events, as defined in the amendment. Upon the occurrence of a pricing decrease triggering event, the interest rates for the Senior Credit Facilities may revert to the Eurodollar rate plus
5.25%
or the base rate plus
4.25%
.
As discussed below, the net proceeds of approximately
$194.5 million
from the issuance of the 2021 Notes on February 11, 2014 were used to repay
$59.3 million
of the Revolving Credit Facility and
$135.2 million
of the Term Loan Facilities. In addition, approximately
$54.2 million
of the net proceeds from the sale of the Home Health Business (see Note 5 - Discontinued Operations) were used to repay
$17.2 million
of the Revolving Credit Facility and
$37.0 million
of the Term Loan Facilities. Once repaid, amounts under Term Loan Facilities may not be reborrowed. The Senior Credit Facilities are secured by substantially all of the Company's and its subsidiaries' assets.
The partial repayments of the Senior Credit Facilities as a result of the issuance of the 2021 Notes and from the sale of the Home Health Business were a pricing decrease triggering event that resulted in the interest rates reverting to the Eurodollar rate plus
5.25%
or the base rate plus
4.25%
. As a result of this rate decrease, the interest rate related to the Revolving Credit Facility is approximately
7.00%
and
6.5%
for the Term Loan Facilities. The interest rates may vary in the future depending on the Company's consolidated net leverage ratio.
The Revolving Credit Facility matures on July 31, 2018 at which time all principal amounts outstanding are due and payable. The Term Loan Facilities each mature on July 31, 2020 at which time the remaining principal amount of approximately
$222.8 million
is due and payable.
Issuance of 2021 Notes
On February 11, 2014, the Company issued
$200.0 million
aggregate principal amount of
8.875%
senior notes due 2021 (the "2021 Notes"). The 2021 Notes are senior unsecured obligations of the Company and are fully and unconditionally guaranteed by all existing and future subsidiaries of the Company. The 2021 Notes were offered in the United States to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons in reliance on Regulation S under the Securities Act pursuant to an Indenture (the “2021 Notes Indenture”), dated February 11, 2014, by and among the Company, the guarantors named therein and U.S. Bank National Association, as trustee.
Interest on the 2021 Notes accrues at a fixed rate of
8.875%
per annum and is payable semi-annually in cash in arrears on February 15 and August 15 of each year, commencing on August 15, 2014. The debt discount of
$5.0 million
at issuance is being amortized as interest expense through maturity which will result in the accretion over time of the outstanding debt balance to the principal amount. As of
March 31, 2014
, there are no quoted prices or active markets for the 2021 Notes. The 2021 Notes are the Company's senior unsecured obligations and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness.
The 2021 Notes are guaranteed on a full, joint and several basis by each of the Company's existing and future domestic restricted subsidiaries that is a borrower under any of the Company's credit facilities or that guarantees any of the Company's debt or that of any of its restricted subsidiaries, in each case incurred under the Company's credit facilities.
The Company may redeem some or all of the 2021 Notes prior to February 15, 2017 by paying a “make-whole” premium. The Company may redeem some or all of the 2021 Notes on or after February 15, 2017 at specified redemption prices. In addition, prior to February 15, 2017, the Company may redeem up to
35%
of the 2021 Notes with the net proceeds of certain equity offerings at a price of
108.875%
plus accrued and unpaid interest, if any. The Company is obligated to offer to repurchase the 2021 Notes at a price of
101%
of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events. These restrictions and prohibitions are subject to certain qualifications and exceptions.
The 2021 Notes Indenture contains covenants that, among other things, limit the Company's ability and the ability of certain of the Company's subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of the Company's restricted subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) make investments, (viii) sell assets, including capital stock of subsidiaries, (ix) use the proceeds
from sales of assets, including capital stock of restricted subsidiaries, and (x) enter into transactions with affiliates. In addition, the 2021 Notes Indenture requires, among other things, the Company to provide financial and current reports to holders of the 2021 Notes or file such reports electronically with the U.S. Securities and Exchange Commission (the “SEC”). These covenants are subject to a number of exceptions, limitations and qualifications set forth in the 2021 Notes Indenture.
Pursuant to the terms of the Second Amendment to the Senior Credit Facilities, the Company used approximately
$194.5 million
of the net proceeds of the offering to repay
$59.3 million
of the Revolving Credit Facility and
$135.2 million
of the Term Loan Facilities.
In connection with the issuance of the 2021 Notes, the Company entered into a registration rights agreement on February 11, 2014 with certain guarantors of the 2021 Notes named therein and Jefferies LLC, on behalf of itself and the other initial purchasers named therein (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company has agreed to file an exchange offer registration statement to exchange the 2021 Notes for substantially identical notes registered under the Securities Act unless the exchange offer is not permitted by applicable law or the policy of the SEC. The Company has also agreed to file a shelf registration statement to cover resales of notes under certain circumstances. The Company has agreed to file the exchange offer registration statement with the SEC within 360 days of the issue date of the 2021 Notes and use commercially reasonable efforts to have the exchange offer registration statement declared effective within 450 days of the issue date and to complete the exchange offer with respect to the 2021 Notes within 30 days of effectiveness. In addition, the Company agreed to use commercially reasonable efforts to file the shelf registration statement as promptly as practicable and to use commercially reasonable efforts to cause such shelf registration statement to be declared effective by the SEC within 90 days of the event giving rise to such obligation. If the Company fails to satisfy its registration obligations under the Registration Rights Agreement, it will be required to pay additional interest to the holders of the 2021 Notes under certain circumstances.
Deferred Financing Costs
In connection with the issuance of the 2021 Notes, the Company incurred underwriting fees, agent fees, legal fees and other expenses of
$1.2 million
that are being amortized over the term of the 2021 Notes.
Interest Expense, net
Interest expense consisted of the following for the
three months ended March 31, 2014
and
2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Revolving Credit Facility
|
$
|
584
|
|
|
$
|
—
|
|
Term Loan Facilities
|
5,750
|
|
|
—
|
|
Prior Credit Facility
|
—
|
|
|
402
|
|
2015 Notes
|
—
|
|
|
5,766
|
|
2021 Notes
|
2,307
|
|
|
—
|
|
Amortization of deferred financing costs
|
1,877
|
|
|
356
|
|
Amortization of debt discount
|
66
|
|
|
—
|
|
Other, net
|
(85
|
)
|
|
(46
|
)
|
Interest expense, net
|
$
|
10,499
|
|
|
$
|
6,478
|
|
The increase in interest expense during the
three months ended March 31, 2014
as compared to the same period in
2013
results from higher debt levels partially offset by lower interest rates. The increase in debt primarily relates to the acquisition of the CarePoint Business.
NOTE 9--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
United States Attorney's Office for the Southern District of New York and New York State Attorney General Investigation
Effective January 8, 2014, the Company entered into the Federal Settlement Agreement with the DOJ and David M. Kester (the “Relator”). The Federal Settlement Agreement represented the federal and private component of the Company's previously disclosed agreement in principle, first announced on December 16, 2013, to settle all civil claims under the False Claims Act and related statutes and all common law claims (collectively, the “Claims”) that could have been brought by the DOJ and Relator in the Civil Action (as defined below) relating to the distribution of the Medication by the Company's legacy specialty pharmacy division that was divested in May 2012 (the “Legacy Division”). Effective February 11, 2014, the Company entered into the State Settlement Agreements with the Settling States. The State Settlement Agreements represented the state component of the Company's previously disclosed agreement in principle, first announced on December 16, 2013, to settle the Claims that could have been brought by the Settling States that arose out of the Legacy Division's distribution of the Medication.
As previously disclosed in September 2013, the Company has cooperated with the United States Attorney’s Office (the “USAO”) for the Southern District of New York (the “SDNY”) and the New York State Attorney General's Medicaid Fraud Control Unit (the "NYMFCU" and together with the USAO, the "Government") by producing documents and information regarding the Legacy Division’s distribution of the Medication. As reflected in the Federal Settlement Agreement, the Company was informed by the Government for the first time in September 2013 that the Government was contemplating claims against the Company relating to the Legacy Division’s distribution of the Medication. Thereafter, and in connection with confidential settlement discussions with the Government, the Company was first informed confidentially that the Company and others were named as defendants in a sealed
qui tam
lawsuit (a whistleblower action brought by a private citizen, the Relator, on behalf of the government) filed in the SDNY by the Relator, in a case titled United States of America, et al., ex. Rel Kester v. Novartis Pharmaceuticals Corporation, et al, Civil Action No. 11-CIV-8196 (the “Civil Action”) regarding the Legacy Division’s distribution of the Medication and alleging violations of the False Claims Act and related statutes. Until January 8, 2014, the Company was prohibited from publicly disclosing any information related to the existence of the Civil Action. On January 8, 2014, the Civil Action was unsealed and made public on order of the court.
With the execution of the Federal Settlement Agreement and the State Settlement Agreements (collectively the "Settlement Agreements"), the Company expects the Civil Action to be fully resolved, and also expects to be fully resolved the federal and state claims that were or could have been raised in the Civil Action. All federal claims and all state claims by the Settling States that have been or could be brought against it in the Civil Action have been dismissed with prejudice. The State Settlement Agreements expressly recognize and affirmatively provide that, by entering into the State Settlement Agreements, the Company has not made any admission of liability and the Company expressly denies the allegations in the Civil Action.
As a part of the State Settlement Agreements, the Company has also resolved any and all claims that the Settling States or their representatives, including the National Association of Medicaid Fraud Control Units (the “NAMFCU”) (which represented the offices of the Attorneys General of the Settling States), could bring for attorney’s fees, investigative fees and/or administrative costs related to the Civil Action. We have also separately resolved any and all claims for certain investigative/administrative costs and attorney’s fees related to the Civil Action incurred by the DOJ, Relator and the NAMFCU for approximately
$1.1 million
in the aggregate. The Company does not anticipate any further claims relating to the matters involved in the Settlement Agreements. The Settlement Agreements do not, however, preclude the U.S. Department of Health and Human Services, the Office of the Inspector General or any state from taking any administrative actions.
Under the Settlement Agreements, the Company will pay an aggregate of
$15.0 million
, plus interest (at an annual rate of
3.25%
) in three approximately annual payments from January 2014 through January 2016. The Settlement Agreements represented a compromise to avoid the costs, distraction and uncertainty of protracted litigation. The Settlement Agreements do not include any admission of wrongdoing, illegal activity, or liability by the Company or its employees, directors, officers or agents. The lenders under the Company's Senior Credit Facilities provided their consent to the Settlement Agreements. In connection with this consent, the Company paid the lenders an amount of
$500,000
.
During the year ended December 31, 2013, the Company included in its results of discontinued operations an accrual of
$15.0 million
in connection with the government’s investigation regarding certain operations of the Legacy Division. As of
March 31, 2014
, the Company has paid
$3.0 million
, including interest, related to the Settlement Agreements and
$450,000
of fees to the Relator.
Securities Class Action Litigation in the Southern District of New York
On September 30, 2013, a putative securities class action lawsuit was filed against the Company and certain of its officers on behalf of the putative class of purchasers of our securities between August 8, 2011 and September 20, 2013, inclusive.
On November 15, 2013, a putative securities class action lawsuit was filed against the Company and certain of its directors and officers and certain underwriters in the Company's April 2013 underwritten public offering of its common stock, on behalf of the putative class of purchasers of our securities between August 8, 2011 and September 23, 2013, inclusive.
The two class action lawsuits were consolidated and a lead plaintiff was appointed on December 19, 2013. The Company denies any allegations of wrongdoing in the consolidated class action lawsuit. The lead plaintiff filed a consolidated complaint on February 19, 2014 against the Company, certain of its directors and officers, certain underwriters in the Company's April 2013 underwritten public offering of its common stock, and a certain stockholder of the Company. The consolidated complaint is brought on behalf of a putative class of purchasers of the Company's securities between November 9, 2012 and November 6, 2013, inclusive, and persons and entities who purchased the Company's securities pursuant or traceable to two underwritten public offerings of the Company’s common stock conducted in April 2013, and August 2013. The consolidated complaint alleges generally that the defendants made material misstatements and/or failed to disclose matters related the Legacy Division’s distribution of the Medication as well as the Company’s PBM Services segment. The consolidated complaint asserts claims under Sections 11, 12(a)(2) and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. All defendants in the case moved to dismiss the consolidated complaint on April 28, 2014. Pursuant to the current scheduling order governing the case, the plaintiffs' opposition brief is due in June 2014, and the briefing on the motion to dismiss will be complete in July 2014. The Company believes all of the claims in these class action lawsuits are without merit and intends to vigorously defend against these claims. However, there is no assurance that the Company will be successful in its defense or that insurance will be available or adequate to fund any settlement or judgment or the litigation costs of these actions. Additional similar lawsuits may be filed. Moreover, the Company is not able to predict the outcome or reasonably estimate a range of possible loss at this time.
Professional Home Care Services Litigation
On March 31, 2009, Professional Home Care Services, Inc., or PHCS, which is one of the subsidiaries we acquired through our acquisition of CHS, was sued by Alexander Infusion, LLC, a New York-based home infusion company ("Alexander Infusion"), in the Supreme Court of the State of New York (the "Lawsuit"). The complaint alleged principally breach of contract arising in connection with PHCS's failure to consummate an acquisition of Alexander Infusion after failing to satisfy the conditions to PHCS's obligation to close. Alexander Infusion sued for
$3.5 million
in damages. On April 4, 2014, PHCS and the Company entered into a settlement agreement with Alexander Infusion and its affiliate Avantiscripts, LLC (collectively the "Alexander Parties") to resolve all outstanding claims arising out of the Lawsuit in exchange for payment by PHCS to the Alexander Parties in the amount of
$325,000
. The Company did not pay any cash under the settlement agreement. Rather, the settlement amount of
$325,000
was offset against an amount of
$325,000
on accounts receivable due to the Company from the Alexander Parties. Under the Agreement and Plan of Merger, dated as of January 24, 2010, by and among the Company, Camelot Acquisition Corp., Critical Homecare Solutions Holdings, Inc., Kohlberg Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg Offshore Investors V, L.P., Kohlberg TE Investors V, L.P., KOCO Investors V, L.P., Robert Cucuel, Ms. Graves, Nitin Patel, Joey Ryan, Blackstone Mezzanine Partners II L.P., Blackstone Mezzanine Holdings II L.P., and S.A.C. Domestic Capital Funding, Ltd., the former CHS stockholders to indemnify the Company in connection with any losses arising from claims made in respect of the acquisition agreement entered into between PHCS and Alexander Infusion. The Lawsuit was dismissed on April 8, 2014.
PBM Services Payment Delay
The Company has historically engaged a third party processor to process PBM Services cash card claims. The third party processor has ceased paying amounts due to the Company. As of
March 31, 2014
, the total amount owed to the Company is approximately
$6.8 million
. In addition, the third party processor owes the Company approximately
$2.1 million
related to the unconsolidated affiliate that was sold on April 19, 2013. As of
March 31, 2014
, no reserve has been provided for the amounts due to the Company.
Government Regulation
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 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, federal and state regulation and enforcement priorities in this area can be expected to increase, the impact of which cannot be predicted.
From time to time, the Company responds to subpoenas and requests for information from governmental agencies. The Company cannot predict with certainty what the outcome of any of the foregoing might be. While the Company believes it is in substantial compliance with all laws, rules and regulations that affects its business and operations, there can be no assurance that the Company will not be subject to scrutiny or challenge under one or more existing laws or that any such challenge would not be successful. Any such challenge, whether or not successful, could have a material effect upon the Company's Consolidated Financial Statements. A violation of the Federal anti-kickback statute, for example, may result in substantial criminal penalties, as well as suspension or exclusion from the Medicare and Medicaid programs. Moreover, the costs and expenses associated with defending these actions, even where successful, can be significant.
Further, there can be no assurance the Company will be able to obtain or maintain any of the regulatory approvals that may be required to operate its business, and the failure to do so could have a material effect on the Company's Consolidated Financial Statements.
Leases
The Company leases its facilities and certain equipment under various operating leases with third parties. The majority of these leases contain escalation clauses that increase base rent payments based upon either the Consumer Price Index or an agreed upon schedule.
In addition, the Company utilizes capital leases agreements with third parties to obtain certain assets such as vehicles. Interest rates on capital leases are both fixed and variable and range from
3%
to
7%
.
As of
March 31, 2014
, future minimum lease payments, including interest, under operating and capital leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Capital Leases
|
|
Total
|
2014 (nine months)
|
$
|
6,807
|
|
|
$
|
355
|
|
|
$
|
7,162
|
|
2015
|
7,798
|
|
|
398
|
|
|
8,196
|
|
2016
|
6,215
|
|
|
102
|
|
|
6,317
|
|
2017
|
5,209
|
|
|
43
|
|
|
5,252
|
|
2018
|
3,594
|
|
|
5
|
|
|
3,599
|
|
2019 and thereafter
|
3,490
|
|
|
—
|
|
|
3,490
|
|
Total
|
$
|
33,113
|
|
|
$
|
903
|
|
|
$
|
34,016
|
|
Rent expense for leased facilities and equipment was approximately
$2.0 million
and
$1.8 million
for the
three months ended March 31, 2014
and
2013
, respectively.
Purchase Commitments
As of
March 31, 2014
, the Company had commitments to purchase prescription drugs from drug manufacturers of approximately
$26.5 million
during the remainder of
2014
. These purchase commitments are made at levels expected to be used in the normal course of business.
NOTE 10--OPERATING AND REPORTABLE SEGMENTS
With the sale of substantially all of the Company’s Home Health Services segment, the Company's operating and reportable segments, “Infusion Services," and “PBM Services,” reflect how the Company's chief operating decision maker reviews the Company's results in terms of allocating resources and assessing performance.
The Infusion Services operating and reportable segment provides services consisting of home infusion therapy, respiratory therapy and the provision of durable medical equipment, products and services. Infusion services include the dispensing and administering of infusion-based drugs, which typically require additional nursing and clinical management services, equipment to administer the correct dosage and patient training designed to improve patient outcomes. Home infusion services also include the dispensing of certain self-injectable therapies.
The PBM Services operating and reportable segment consists of integrated pharmacy benefit management ("PBM") services, which primarily consists of discount card programs. The discount card programs provide a cost effective alternative for individuals who may be uninsured, underinsured or may have restrictive coverage that disallows reimbursement for certain medications. Under these discount programs, individuals who present a discount card at any of the Company's participating network pharmacies receive prescription medications at a discounted price compared to the retail price.
The Company's chief operating decision maker evaluates segment performance and allocates resources based on Segment Adjusted EBITDA. Segment Adjusted EBITDA is defined as income (loss) from continuing operations, net of income taxes adjusted for net interest expense, income tax expense (benefit), depreciation, amortization of intangibles and stock-based compensation expense and prior to the allocation of certain corporate expenses. Segment Adjusted EBITDA excludes acquisition, integration, and transitional expenses; restructuring expense; and other expenses related to the Company's strategic assessment. Segment Adjusted EBITDA also excludes the operating losses of start-up branch locations that the Company has invested in organically rather than through acquisition. Segment Adjusted EBITDA is a measure of earnings that management monitors as an important indicator of operating and financial performance. The accounting policies of the operating and reportable segments are consistent with those described in the Company's summary of significant accounting policies.
As a result of the sale of substantially all of the Company's Home Health Services segment, prior period operating results and supplementary data have been reclassified to exclude the Home Health Services segment.
Segment Reporting Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Results of Operations:
|
|
|
|
Revenue:
|
|
|
|
Infusion Services - product revenue
|
$
|
215,900
|
|
|
$
|
150,024
|
|
Infusion Services - service revenue
|
5,519
|
|
|
4,353
|
|
Total Infusion Services revenue
|
221,419
|
|
|
154,377
|
|
PBM Services - service revenue
|
18,224
|
|
|
26,752
|
|
Total revenue
|
$
|
239,643
|
|
|
$
|
181,129
|
|
|
|
|
|
Adjusted EBITDA by Segment before corporate overhead:
|
|
|
|
|
Infusion Services
|
$
|
14,853
|
|
|
$
|
11,909
|
|
PBM Services
|
1,675
|
|
|
6,195
|
|
Total Segment Adjusted EBITDA
|
16,528
|
|
|
18,104
|
|
|
|
|
|
Corporate overhead
|
(7,476
|
)
|
|
(7,916
|
)
|
|
|
|
|
Interest expense, net
|
(10,499
|
)
|
|
(6,478
|
)
|
Income tax (expense) benefit
|
(3,491
|
)
|
|
224
|
|
Depreciation
|
(3,836
|
)
|
|
(2,418
|
)
|
Amortization of intangibles
|
(1,703
|
)
|
|
(2,082
|
)
|
Stock-based compensation expense
|
(2,886
|
)
|
|
(1,973
|
)
|
Acquisition and integration expenses
|
(6,499
|
)
|
|
(4,623
|
)
|
Restructuring and other expenses and investments
|
(5,560
|
)
|
|
(1,279
|
)
|
Loss from continuing operations, net of income taxes
|
$
|
(25,422
|
)
|
|
$
|
(8,441
|
)
|
|
|
|
|
Supplemental Operating Data
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
Total Assets:
|
|
|
|
Infusion Services
|
$
|
808,871
|
|
|
$
|
793,475
|
|
PBM Services
|
31,475
|
|
|
25,239
|
|
Corporate unallocated, including cash and cash equivalents
|
59,714
|
|
|
53,169
|
|
Assets from discontinued operations
|
—
|
|
|
64,959
|
|
Assets associated with discontinued operations, not sold
|
16
|
|
|
16
|
|
Total Assets
|
$
|
900,076
|
|
|
$
|
936,858
|
|
NOTE 11--CONCENTRATION OF RISK
Customer and Credit Risk
The Company provides trade credit to its customers in the normal course of business.
One payor, UnitedHealthcare, accounted for approximately
23%
and
21%
of revenue during the
three months ended March 31, 2014
and
2013
. The revenue is related to the Infusion Services segment.
Therapy Revenue Risk
The Company sells products related to the Immune Globulin therapy, which represented
18%
and
17%
of revenue during the
three months ended March 31, 2014
and
2013
. The revenue is related to the Infusion Services segment.
NOTE 12--INCOME TAXES
The Company’s Federal and state income tax expense (benefit) from continuing operations for the
three months
ended
March 31, 2014
and
2013
is summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Current
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
(702
|
)
|
State
|
783
|
|
|
25
|
|
Total current
|
783
|
|
|
(677
|
)
|
Deferred
|
|
|
|
|
|
Federal
|
2,396
|
|
|
396
|
|
State
|
312
|
|
|
57
|
|
Total deferred
|
2,708
|
|
|
453
|
|
Total income tax expense (benefit)
|
$
|
3,491
|
|
|
$
|
(224
|
)
|
The Company’s reconciliation of the statutory rate from continuing operations to the effective income tax rate for the
three months
ended
March 31, 2014
and
2013
is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Tax benefit at statutory rate
|
$
|
(7,670
|
)
|
|
$
|
(3,033
|
)
|
State tax expense (benefit), net of Federal taxes
|
509
|
|
|
(135
|
)
|
Change in tax contingencies
|
—
|
|
|
(512
|
)
|
Valuation allowance changes affecting income tax expense
|
10,601
|
|
|
3,071
|
|
Non-deductible transaction costs and other
|
51
|
|
|
385
|
|
Income tax expense (benefit)
|
$
|
3,491
|
|
|
$
|
(224
|
)
|
NOTE 13--STOCK-BASED COMPENSATION
BioScrip Equity Incentive Plans
Under the Company's Amended and Restated 2008 Equity Incentive Plan (as amended and restated, the “2008 Plan”), the Company may issue, among other things, incentive stock options (“ISOs”), non-qualified stock options (“NQSOs”), stock appreciation rights ("SARs"), restricted stock, performance shares and performance units to employees and directors. While SARS are authorized under the 2008 Plan, they may also be issued outside of the plan. On June 10, 2010, the Company's stockholders approved an amendment to the 2008 Plan to increase the number of authorized shares of common stock available for issuance by
3,275,000
shares to
6,855,000
shares. On May 7, 2013, the Company's stockholders approved an amendment to the 2008 Plan to increase by
300,000
shares (from
500,000
to
800,000
) the number of shares in the aggregate that may be subject to awards granted to directors.
As of
March 31, 2014
, there were
1,082,856
shares that remained available for grant under the 2008 Plan.
BioScrip/CHS Equity Plan
Effective upon closing of the acquisition of CHS, the CHS 2006 Equity Incentive Plan was adopted by the Company and renamed the “BioScrip/CHS 2006 Equity Incentive Plan” (as amended and restated, the “BioScrip/CHS Plan”). The Board of Directors further amended the BioScrip/CHS Plan to provide for it to have substantially the same terms and provisions as the 2008 Plan.
As of
March 31, 2014
, there were
755,440
shares that remained available under the BioScrip/CHS Plan.
Stock Options
The Company recognized compensation expense related to stock options of
$1.8 million
and
$1.4 million
during the
three months ended March 31, 2014
and
2013
, respectively.
Restricted Stock
The Company recognized compensation expense related to restricted stock awards of
$1.1 million
and
$0.2 million
during the
three months ended March 31, 2014
and
2013
, respectively.
Stock Appreciation Rights
The Company recognized compensation (benefit) expense related to stock appreciation rights awards of
$(0.1) million
and
$0.4 million
during the
three months ended March 31, 2014
and
2013
, respectively.
Employee Stock Purchase Plan
On May 7, 2013, the Company's stockholders approved the BioScrip, Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP provides all eligible employees, as defined under the ESPP, the opportunity to purchase up to a maximum number of shares of Common Stock of the Company as determined by the Compensation Committee. Participants in the ESPP may acquire the Common Stock at a cost of
85%
of the lower of the fair market value on the first or last day of the Plan Year from January 1st through December 31st. The Company has filed a Registration Statement on Form S-8 to register
750,000
shares of Common Stock, par value
$0.0001
per share, for issuance under the ESPP. As of
March 31, 2014
, no shares have been issued and no expense has been incurred under the ESPP. The Company is currently in the roll-out and implementation phase of the ESPP.