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8-K - FORM 8-K - Option Care Health, Inc. | y83196e8vk.htm |
EX-99.1 - EX-99.1 - Option Care Health, Inc. | y83196exv99w1.htm |
EX-23.1 - EX-23.1 - Option Care Health, Inc. | y83196exv23w1.htm |
EX-99.3 - EX-99.3 - Option Care Health, Inc. | y83196exv99w3.htm |
Exhibit 99.2
Managements
Discussion and Analysis of Financial Condition and
Results of Operations of CHS
Results of Operations of CHS
The following information should be read in conjunction with the
financial statements and related notes thereto of CHS included
in the definitive proxy statement on Schedule 14A filed by
BioScrip, Inc. with the Securities and Exchange Commission on
February 24, 2010, or the BioScrip Proxy Statement, and included
as Exhibit 99.1 to this
Current Report on Form 8-K. The
following discussion may contain forward-looking statements that
reflect the plans, estimates and beliefs of CHS and that are
subject to known and unknown risks and uncertainties. The actual
results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to,
those discussed below and in the BioScrip Proxy Statement, particularly in Risk
Factors and Cautionary Statement Concerning
Forward-Looking Statements in the BioScrip Proxy Statement.
CHSs historical financial data discussed below reflects
the historical results of operations and financial position of
Critical Homecare Solutions Holdings, Inc. and its consolidated
subsidiaries and its predecessors, Specialty Pharma and New
England Home Therapies. Because of the limited time that has
passed since CHSs formation and its subsequent acquisition
activity, it may be difficult to evaluate CHSs future
business prospects based on its prior operating results and
those of the companies it has acquired and its historical
results of operations should not be considered indicative of
what its future results of operations will be.
Overview
CHS is a leading provider of comprehensive home infusion therapy
services to patients suffering from acute or chronic conditions.
CHS operates in two business segments, home infusion therapy and
home nursing. Through CHSs home infusion therapy segment,
CHS delivers and provides complex intravenous pharmaceutical
products and corresponding clinical support services to patients
with chronic conditions requiring long-term infusion care
services and acute conditions requiring short-term infusion care
services. Through CHSs home nursing segment, it provides
skilled nursing and other therapy services, including physical
therapy, occupational and speech therapy, medical social work
and home health aide services, to recovering, disabled,
chronically ill or terminally ill adult and pediatric patients
in need of medical, nursing or therapeutic treatment, and
assistance with essential activities of daily living.
CHS estimates that a substantial portion of the home infusion
market consists of independent home infusion providers, and it
believes that industry dynamics in the currently fragmented home
infusion market favor consolidated providers and the operational
efficiencies that come with scale.
CHSs business, and its industry in general, is subject to
known material uncertainties, in both the short and long term,
that could impact CHSs results of operations, such as
uncertainties relating to federal and state regulation of
CHSs industry and uncertainties related to CHSs
ability to receive reimbursement from its governmental and
non-governmental payors. CHSs management seeks in the
ordinary course of its business to avoid or mitigate the effects
of these uncertainties, if any, on its business. All of
CHSs internal policies and procedures are designed to
cause its operations to be in compliance with the federal and
state regulations to which its business and industry are
subject. In addition, CHSs management maintains regular
contact with industry consultants and outside counsel to
evaluate any developments in federal or state regulations that
could affect CHS and to identify ways CHS can mitigate the
effect of any such developments on its results of operations.
1
The
Company
CHS was incorporated in Delaware on August 8, 2006, but its
predecessors, Specialty Pharma and New England Home Therapies,
have been in the home healthcare business since 2002 and 2000,
respectively. Effective September 1, 2006, CHS acquired all
of the outstanding shares of each of its predecessors. CHS paid
a total consideration of approximately $34.9 million,
consisting of $30.9 million in cash and the assumption of
$4.0 million in liabilities, for Specialty Pharma, and
approximately $21.2 million, consisting of
$18.5 million in cash and the assumption of
$2.7 million in liabilities, for New England Home
Therapies. CHS financed a portion of the purchase prices of the
acquisitions of its predecessors with borrowings under its first
lien credit facility. CHS financed the remainder of the purchase
prices of its acquisitions of its predecessors with the proceeds
of the issuance of shares of CHSs common stock to
investment funds managed by Kohlberg and certain members of
CHSs management. CHS recorded the acquisition of each of
its predecessors under the purchase method of accounting.
Since the acquisitions of CHSs predecessors, it has
acquired and begun or completed integration of the following
entities:
Date of |
Entity |
Business |
Service |
|||
Acquisition
|
Acquired | Segment(s) | Areas | |||
January 2007
|
Deaconess Enterprises, Inc. | Home Infusion, Home Nursing | Alabama, Georgia, Louisiana, Michigan, Mississippi, Ohio, Pennsylvania, Tennessee, Texas | |||
March 2007
|
Infusion Solutions, Inc. | Home Infusion | New Hampshire, Massachusetts | |||
June 2007
|
Applied Health Care, LLC | Home Infusion | Texas | |||
July 2007
|
Infusion Partners of Brunswick, LLC | Home Infusion | Georgia | |||
July 2007
|
Infusion Partners of Melbourne, LLC | Home Infusion | Florida | |||
August 2007
|
East Goshen Pharmacy, Inc. | Home Infusion | Pennsylvania | |||
April 2008
|
Wilcox Medical, Inc. | Home Infusion | Vermont | |||
September 2008
|
Infusion Partners of Lexington (formerly known as Optioncare of Lexington) | Home Infusion | Kentucky | |||
December 2008
|
National Health Infusion, Inc. | Home Infusion | Florida | |||
June 2009
|
Option Health, Ltd. | Home Infusion, Home Nursing | Illinois, Iowa | |||
See Critical Homecare Solutions Holdings, Inc. Business
DescriptionCHSs History in the
BioScrip Proxy Statement for a more detailed discussion
of CHSs formation and acquisition history.
CHSs
Revenue and Expenses
Net Revenue. CHS generates almost all of its revenue
from reimbursement by government and third-party payors for
goods and services provided to patients. CHS receives payment
for goods and services from a number of sources, including
managed care organizations, government sources, such as Medicare
and Medicaid programs, and commercial insurance. For the fiscal
year ended December 31, 2009, CHS
2
had a payor mix of 52% from managed care organizations and other
third party payors, 24% from Medicare and 24% from Medicaid. See
Critical Accounting Policies and Estimates for
a discussion of CHSs revenue recognition policies.
As noted further in Critical Homecare Solutions Holdings,
Inc. Business DescriptionMedicare
and Medicaid Reimbursement in the BioScrip Proxy Statement, certain changes in government
regulation and policies are anticipated to have a negative
impact on future revenue of CHS. In July 2008, Congress passed
the Medicare Improvements for Patients and Providers Act of
2008, or MIPPA, which delayed the Durable Medical Equipment,
Prosthetics, Orthotics and Supplies, or DMEPOS, competitive
bidding program authorized under the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, which we refer to as
the Medicare Modernization Act, during 2008. The bidding began
October 21, 2009 and the program is scheduled to take
effect on January 1, 2011. The long-term impact of the
competitive bidding program cannot be determined at this point
in time.
AWP and average sales price, which we refer to as ASP,
information is published by First DataBank and certain other
private companies, including Medi-Span. Effective
September 26, 2009, First DataBank and Medi-Span reduced
the mark-up
factor applied to WAC, on which AWP is based, from 1.25 to 1.20
for approximately 18,000 national drug codes. These AWP
publishers also have indicated that, within the next two years,
they will discontinue publication of AWP information. The impact
of this reduction in AWP was to reduce CHSs gross margins
beginning in the fourth quarter of 2009.
Cost of Revenue. Cost of revenue consists of two
components: cost of goods and cost of services. Cost of goods
consists of the actual cost of pharmaceuticals and other medical
supplies dispensed to patients, but does not reflect
depreciation. Cost of services consists of all other costs
directly related to the production of revenue, including the
salary and benefit costs for the pharmacists, nurses and
contracted workers directly involved in providing service to the
patient.
Selling, Distribution, and Administrative
Expenses. Selling expenses relate primarily to
salaries, benefits, and payroll taxes related to CHSs
sales and marketing representatives. Distribution costs are
included in selling, distribution, and administrative expenses
and represent the cost incurred to deliver product or services
to the end users. Included are salary and benefit costs related
to drivers and dispatch personnel and amounts paid to courier
and other outside shipping vendors. Administrative expense
represents CHSs overhead costs and consists of salaries
and related taxes and benefits, payroll taxes, rent and
insurance.
Critical
Accounting Policies and Estimates
Use of Estimates. The preparation of consolidated
financial statements in accordance with accounting principles
generally accepted in the United States of America require
management to make estimates and assumptions that affect the
amounts reported in CHSs financial statements and
accompanying notes. Actual results could vary from estimates.
The items in CHSs financial statements that it believes
are the most dependent on the application of significant
estimates and judgments are as follows:
Revenue Recognition. Patient revenue is recorded in
the period during which goods are shipped or delivered or the
services are provided. When both goods and services are
provided, revenue is recognized upon confirmation that both the
services were provided and the goods were delivered to the
patient. When only goods are provided to the patient and the
patient has the means to use the goods without requiring nursing
or other related services, the revenue is recognized upon
confirmation of the delivery
3
of the goods. When only services are provided, revenue is
recognized upon confirmation that the services have been
provided. CHSs agreements with payors may include a
provision for the use of a per diem payment for
certain infusion services provided to patients. The per diem
arrangement may include a variety of both goods and services,
including, but not limited to, rental of medical equipment, care
coordination services and medical supplies. Because CHS receives
a single price for both goods and services in one combined
billing, it cannot split revenue on its statements of income
between product revenue and service revenue.
The Multiple-Element Arrangements Subtopic of the ASC addresses
situations in which multiple products
and/or
services are delivered at different times under one arrangement
with a customer and provides guidance in determining whether
multiple deliverables should be used as separate units of
accounting. CHS provides a variety of therapies to patients, the
majority of which have multiple deliverables, such as the
delivery of drugs and supplies and the provision of related
nursing services to train and monitor patient administration of
the drugs. After applying the criteria from the final model in
the Multiple-Element Arrangements Subtopic of the ASC, CHS
concluded that separate units of accounting do exist in its
revenue arrangements with multiple deliverables.
CHSs revenue recognition policy is designed to recognize
revenue when each deliverable is provided to the patient. For
example, revenue from drug sales is recognized upon confirmation
of the delivery of the products, and revenue from nursing
services is recognized upon receipt of nursing notes confirming
the service has been provided. In instances in which the amount
allocable to the delivered item is contingent upon delivery of
additional items, CHS recognizes revenue after all the
deliverables in the arrangement have been provided. In instances
that a per diem is provided for daily usage of supplies and
equipment, revenue is recognized on a per diem basis.
The amounts billed to third-party payors and patients are
directly offset by appropriate allowances to give recognition to
third-party payor arrangements. Net revenue recognition and
allowances for uncollectible billings require CHS to use
estimates. Once known, any changes to these estimates are
reflected in CHSs statement of operations.
Both of CHSs segments utilize billing and accounts
receivable systems that are highly automated. While certain
inputs into the system may be manual, the significant portion of
the billing and accounts receivable process is automated. In
CHSs infusion segment, the majority of its acquisitions
were utilizing CHSs platform application prior to
acquisition. Integration efforts for these systems have only
required a migration from the divisions separate
applications to the company-wide instance. The migration is not
considered to be high risk, as very little user education is
required since the applications are identical. As of
December 31, 2009, all divisions have converted or migrated
to the company-wide CPR+ application.
CHS has selected the automated billing and accounts receivable
system used by its adult nursing division as our platform
application for nursing segment. CHSs private duty nursing
division converted to this system on October 1, 2007. With
this conversion, the majority of CHSs nursing operations
are now on a single platform.
Patient self pay revenue represented 1% of net revenue for the
fiscal year ended December 31, 2009, while self pay
represented 5% of accounts receivable as of December 31,
2009. The collections of co-insurance due from the patient and
other self-pay amounts are pursued directly by the local
operations. The amount of self pay is not material for the
infusion segment and only applies for a small number of payors
for nursing. Additionally, self pay billings are minimized as
CHSs policy requires insurance verification before service
is rendered, unless the patient is admitted and requires service
at night, on a
4
weekend or on a holiday. The frequency of these exceptions is
not material and has not resulted in a significant amount of
self pay net revenue. CHSs policy is to make effort to
collect the known and identified self-pay components of the
billing arrangement at the time of delivery of care. When the
payment cannot be obtained at the point of delivery, CHS
performs
follow-up
billings and contacts with the patients. When these efforts are
not successful and the account has been written off as a bad
debt, CHS may engage outside collection agencies to assist in
the pursuit of collection. CHS does not determine its bad debt
provision separately for self pay as self pay is not material
and is not considered to be a key metric of its business.
Home
infusion
In CHSs home infusion segment, infusion therapy and
related healthcare service revenue are reported at the estimated
net realizable amounts from patients and third-party payors.
Pricing is typically negotiated in advance on the basis of AWP
minus some percentage of contractual discount or ASP plus some
percentage of contractual discount, which is the typical means
of negotiating pricing in the industry. AWP and ASP information
is published by First Databank and certain other private
companies.
Due to the nature of the industry and the reimbursement
environment in which CHS operates, certain estimates are
required to record net revenue and accounts receivable at their
net realizable values. Inherent in these estimates is the
possibility that they will have to be revised or updated as
additional information becomes available. Specifically, the
complexity of many third-party billing arrangements and the
uncertainty of reimbursement amounts for certain services from
certain payors may result in adjustments to amounts originally
recorded.
Billings to payors for whom CHS is an
out-of-network
provider represented approximately 9% of net revenue for the
fiscal year ended December 31, 2009 and are generally
submitted at CHSs usual customary charges. However, these
payors typically pay at amounts that are less than CHSs
usual customary charges. CHS estimates the net realizable
revenue on
out-of-network
billings based on its historical experience as well as estimated
realizable amounts provided by the respective payor upon patient
intake and insurance verification. CHS provides contractual
reserves at the time of revenue recognition for the estimated
differences between its initial billings for
out-of-network
patients. The actual difference between the initial estimate and
the amount paid by the payor is recorded at the point of cash
application, claim denial or account review.
Net revenue from payors for whom CHS is contracted as an
in network provider is generally recognized at the
contracted fee schedule amount. Revenue is recorded at the
billing amount, which represents the amount of revenue that is
expected to be realized per the contractual terms. Revenue from
in-network
commercial and other payors represented 60% of net revenue for
the fiscal year ended December 31, 2009.
Revenue from Medicare represented approximately 13% of net
revenue for the fiscal year ended December 31, 2009 and 14%
for the fiscal year ended December 31, 2008 and is
recognized at the published fee schedules. Revenue from various
state Medicaid programs represented approximately 20% of net
revenue for the fiscal year ended December 31, 2009 and 18%
for the fiscal year ended December 31, 2008 and is also
recognized at the published fee schedule amount. Estimated
differences between the amounts initially recognized as net
revenue and actual are reserved for at the time of revenue
recognition based on historical experience and typically relate
to non-covered or denied services.
5
Home
nursing
In CHSs home nursing segment, revenue is recognized as the
treatment plan is administered to the patient and is recorded at
amounts estimated to be received under reimbursement or payment
arrangements with payors. Net revenue to be reimbursed by
contracts with third-party payors are recorded at an amount to
be realized under these contractual arrangements.
Approximately 51% of nursing net revenue for the fiscal year
ended December 31, 2009 was related to Medicare billings.
Under the prospective payment system for Medicare reimbursement,
net revenue is recorded based on a reimbursement rate which
varies on the severity of the patients condition, service
needs and certain other factors. Revenue is recognized ratably
over a
60-day
episode period and is subject to adjustment during this period
if there are significant changes in the patients condition
during the treatment period or if the patient is discharged but
readmitted to another agency within the same
60-day
episode period.
Medicare billings under the prospective payment system are
initially recognized as deferred revenue and are subsequently
recognized as revenue over the
60-day
episode period. The process for recognizing revenue under the
Medicare program is based on certain assumptions and judgments,
the appropriateness of the clinical assessment of each patient
at the time of certification, and the level of adjustments to
the fixed reimbursement rate relating to patients who receive a
limited number of visits, have significant changes in condition
or are subject to certain other factors during the episode.
For non-Medicare payors, CHS has established contractual
reserves for the amounts initially billed to the payors relative
to the amounts expected to be realized. These estimates are
based on CHSs historical experience or specific
contractual requirements identified for certain payors.
Differences between the estimates and the actual contractual
adjustments are typically recorded at the time of cash posting,
claim denial or account review.
Home Nursing and Medicaid. CHS is sensitive to
possible changes in state Medicaid programs as it does business
with several state Medicaid programs. Budgetary concerns in many
states have resulted in, and may continue to result in,
reductions to Medicaid reimbursement and Medicaid eligibility as
well as delays in payment of outstanding claims. Any reductions
to or delays in collecting amounts reimbursable by state
Medicaid programs for CHSs products or services, or
changes in regulations governing such reimbursements, could
cause CHSs revenue and profitability to decline and
increase its working capital requirements.
As examples, effective August 1, 2008, CHSs contract
with Amerigroup Community Care, or Amerigroup, was amended to
reduce the private duty nursing rate. Furthermore, TennCare,
CHSs largest Medicaid customer representing approximately
7.6% of CHSs net revenue for the fiscal year ended
December 31, 2009, has experienced substantial financial
challenges since its inception in 1994. In 2002, the State of
Tennessee proposed, but later withdrew, limitations on home
health services. Since mid-2005, the State of Tennessee has
restructured TennCare significantly and has disenrolled
approximately 323,000 persons not required to be covered by
federal Medicaid law. These disenrollments impacted our private
duty nursing beginning September 7, 2008. The decrease in
the Amerigroup reimbursement rate and the new restrictions on
private duty nursing eligibility resulted in a decrease in net
revenue of $3.7 million for the fiscal year ended
December 31, 2009, with a corresponding decrease of
$0.3 million in operating expenses, for a net decrease in
operating income of $3.4 million.
The State of Tennessee has recently mandated that certain
patients who were previously subject to traditional TennCare
private duty nursing benefits be shifted to an agency that
contracts with the
6
Tennessee Department of Mental Retardation Services, which we
refer to as DMRS. CHS has, to date, elected not to become a
provider under the DMRS benefit. Due to a lack of DMRS providers
and pending appeals that are underway, this change has not had a
significant impact on CHSs business. This change or
similar changes in benefits designed to reduce Medicaid program
budgetary constraints may, however, have an adverse impact on
CHSs patient population and results of operations in the
future.
Accounts Receivable and Allowances for Doubtful
Accounts. CHSs accounts receivable consist of
amounts owed by various governmental agencies, insurance
companies and private patients. Management performs periodic
analyses to evaluate accounts receivable balances to ensure that
recorded amounts reflect net realizable values. Although CHS has
a significant concentration of receivables from Medicare and
Medicaid, it does not believe there are any significant credit
risks associated with the receivables from Medicare and Medicaid
and other state administered programs.
CHSs accounts receivable are reported net of contractual
adjustments. Generally, CHS bills third-party payors based on
the contractual charges or usual customary charges for goods and
services provided and then contractually adjusts the revenue
down to the anticipated collectible amount based on its
interpretation of the terms of the applicable managed care
contract, fee schedule or other arrangement with the payor.
CHS has established an allowance for doubtful accounts to report
accounts receivable at the estimated net realizable amounts to
be received from third-party payors. Increases to this reserve
are reflected as a provision for bad debt in CHSs
statement of operations. CHS generates accounts receivable aging
reports from its billing systems and utilizes these reports to
help it monitor the condition of its outstanding receivables and
evaluate the performance of its billing and reimbursement staff.
CHS also utilize these aging reports, combined with historic
write-off statistics generated from its billing systems, to
determine its allowance for doubtful accounts. CHS regularly
performs an analysis of the collectability of accounts
receivable and considers such factors as prior collection
experience and the age of the receivables.
CHS does not require its patients or other payors to carry
collateral for any amounts owed to CHS for services provided.
Other than as discussed above, CHSs concentration of
credit risk relating to accounts receivable is limited due to
its diversity of patients and payors. Further, CHS generally
does not provide charity care.
The following table details CHSs accounts receivable
balances by aging category, excluding unbilled accounts
receivable and contractual allowances, at December 31, 2009
and 2008:
December 31, |
December 31, |
|||||||
Aging Category
|
2009 | 2008 | ||||||
< 31 days
|
$ | 19,632 | $ | 22,216 | ||||
31-60 days
|
7,593 | 8,123 | ||||||
61-90 days
|
3,902 | 5,549 | ||||||
> 90 days
|
12,097 | 21,755 | ||||||
Total accounts receivable, gross
|
$ | 43,224 | $ | 57,643 | ||||
Allowance for uncollectible accounts
|
(5,117 | ) | (9,675 | ) | ||||
Allowance for contractual adjustments
|
(819 | ) | (982 | ) | ||||
Unbilled and other
|
4,858 | 5,085 | ||||||
Total accounts receivable, net
|
$ | 42,146 | $ | 52,071 | ||||
(In thousands)
|
7
The aging by payor as of December 31, 2009 is as follows:
Aging Category
|
Medicare | Medicaid | Commercial and Other | Self Pay | ||||||||||||
< 31 days
|
$ | 4,375 | $ | 4,088 | $ | 10,722 | $ | 447 | ||||||||
31-60 days
|
1,924 | 1,619 | 3,701 | 349 | ||||||||||||
61-90 days
|
1,254 | 711 | 1,732 | 204 | ||||||||||||
> 90 days
|
1,521 | 2,346 | 7,019 | 1,212 | ||||||||||||
Total accounts receivable, gross
|
$ | 9,074 | $ | 8,764 | $ | 23,174 | $ | 2,212 | ||||||||
(In thousands)
|
Days sales outstanding, net of reserves, were 58 and 73 at
December 31, 2009 and at December 31, 2008,
respectively.
The accounts receivable aging summary does not include unbilled
accounts receivable, which include billings on hold until the
delivery of all contingent components has been completed (in the
case of certain per diems), billings on hold pending receipt of
documentation required by the third-party payor and billings
pending prior approval from the third-party payor.
As noted above, the majority of CHSs accounts receivable
is due from third-party payors, including Medicare, Medicaid,
commercial and governmental payors. The majority of these payors
are billed electronically. Additionally, CHS receives payment
electronically from a large number of its payors. Hard copy
bills are generated from CHSs automated collection system
and distributed to third-party payors that are not billed
electronically and to self-pay patients. CHSs collection
activities occur at the branch level, with the billing and
collection activities of certain small branches performed by
larger branches located in the same geographic area. Each branch
maintains certain discretion regarding collection activities.
These activities include research of the reasons certain claims
are denied by third-party payors, resubmission of claims to
third-party payors, rebilling and distribution of statements for
self-pay and
follow-up
phone calls to third-party payors and self-pay patients. When
CHSs staff has followed these procedures and has
determined that certain amounts are uncollectible, the amounts
may be written-off, subject to certain required internal
approvals. CHS generally does not use a threshold or dollar
amount in determining whether to pursue collection or to write
off accounts. Write-offs are generally specifically identified,
with each write-off posted to the accounts receivable system.
Write-offs that meet the requirements of collection
agencies policies are turned over to collection agencies
for the further pursuit of payment.
For the fiscal year ended December 31, 2009 and for the
fiscal year ended December 31, 2008, a hypothetical change
of 100 basis points in the bad debt provision as a
percentage of net revenue would have impacted net income before
income taxes by approximately $2.5 million and
$2.3 million, respectively.
Goodwill and Intangible Assets. Goodwill represents
the excess of the cost of acquisitions over the fair value of
net assets acquired. Goodwill is not amortized and is reviewed
annually for impairment utilizing a two-step process. The first
step of the impairment test requires the identification of the
reporting units, and comparison of the fair value of each of
these reporting units to the respective carrying value. The fair
value of the reporting units is determined based on valuation
techniques using the best information that is available, such as
a multiple of earnings before interest, taxes, depreciation and
amortization or discounted cash flow projections. If the
carrying value is less than the fair value, no impairment exists
and the second step is not performed. If the carrying value is
higher than the fair value, there is an indication that
impairment may exist and the second step must be performed to
compute the amount of the impairment. In the second step, the
impairment is computed by comparing
8
the implied fair value of reporting unit goodwill with the
carrying amount of that goodwill. Generally accepted accounting
practices require goodwill to be tested for impairment annually
and when an event occurs or circumstances change such that it is
reasonably possible that an impairment may exist. CHS performs its annual testing in the fourth quarter of each year.
There were no impairment losses recognized for the fiscal year
ended December 31, 2009 or 2008.
Intangible assets consist primarily of non-compete agreements,
trademarks related to brand names arising from acquisitions,
licenses and certificates of need. CHS records intangible assets
at their estimated fair value at the date of acquisition and
amortizes the related cost of the asset over the period of
expected benefit. The fair value of intangible assets assigned
to CHSs acquisitions during the first year subsequent to
the acquisition is based on a preliminary determination and is
subject to adjustment pending a final determination of purchase
price and a final valuation of the assets acquired and
liabilities assumed. Definite life purchased intangibles are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable from estimated future cash flows. In
accordance with generally accepted accounting practices,
intangible assets with indefinite lives are reviewed for
impairment annually or when an event occurs or circumstances
change such that it is reasonably possible that an impairment
may exist. There were no impairment losses recognized for the
fiscal year ended December 31, 2009 or 2008.
Non-compete agreements are amortized on a straight-line basis
over the estimated life of each agreement, which ranges from one
to five years. The trademarks associated with Deaconess HomeCare
have limited lives of five years, and these trademarks are being
amortized over the estimated useful life. Trademarks with
indefinite lives are not amortized but are periodically reviewed
for impairment. Licenses are being amortized over a period of
one to two years. Certificates of need have indefinite lives and
are not amortized but are periodically reviewed for impairment.
Self-insurance. CHS is self-insured up to certain
limits for workers compensation costs and employee medical
benefits. CHS has purchased stop-loss coverage to limit its
exposure to significant individual workers compensation or
employee medical claims. Self-insured losses are accrued for
known and anticipated claims based upon certain assumptions and
historical claim payment patterns as well as estimates of claims
incurred but not yet reported based on historical industry
trends. These assumptions take into consideration the historical
average claim volume, the average cost for settled claims,
current trends in claim costs, changes in CHSs business
and workforce, and general economic factors. CHSs
self-insurance accruals are reviewed on a quarterly basis, or
more frequently if factors dictate a more frequent review is
warranted. CHSs valuation is performed on an annual basis.
Projections of future loss are inherently uncertain because of
the random nature of insurance claim occurrences and could be
significantly affected if future occurrences and claims differ
from historical trends.
Income taxes. CHS accounts for income taxes under
the liability method in accordance with generally accepted
accounting practices. CHS recognizes deferred tax assets and
liabilities for the expected future tax consequences of events
that have been included in its financial statements or tax
returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
CHS estimates the degree to which tax assets and loss
carryforwards will result in a benefit based on expected
profitability by tax jurisdiction.
9
CHS determines if a valuation allowance is required or not on
the basis of an assessment of whether it is more likely than not
that a deferred tax asset will be realized. This assessment
takes into consideration tax planning strategies, including
levels of historical taxable income and assumptions regarding
the availability and character of future taxable income over the
periods in which the deferred tax assets are deductible. The
effect of a change in judgment concerning the reliability of
deferred tax assets would be included in income from operations.
Results of
Operations
Year
ended December 31, 2009 compared to the year ended
December 31, 2008
Net
revenue
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
Home infusion net revenue
|
$ | 187,894 | $ | 164,693 | $ | 23,201 | 14.1 | % | ||||||||
Home nursing net revenue
|
66,173 | 66,175 | (2 | ) | 0.0 | |||||||||||
Total net revenue
|
$ | 254,067 | $ | 230,868 | $ | 23,199 | 10.0 | % | ||||||||
(Dollars in thousands)
|
Net revenue increased from $230.9 million for the fiscal
year ended December 31, 2008 to $254.1 million for the
fiscal year ended December 31, 2009, an increase of
$23.2 million or 10.0%. This change included an increase of
$23.2 million, or 14.1%, in infusion revenue from 2008 to
2009, during which time net revenue increased from
$164.7 million to $187.9 million. The increase was the
result of organic growth and the acquisition of Wilcox effective
April 1, 2008, Infusion Partners of Lexington effective
September 1, 2008, National Health Infusion effective
December 1, 2008 and Option Health effective June 1,
2009.
In July 2008, Congress passed MIPPA, which delayed round one of
the Medicare DMEPOS competitive bidding program authorized under
the Medicare Modernization Act for 18 months but also
imposed a 9.5% nationwide reduction on all items subject to the
competitive bidding process. The fee schedules of certain
commercial payors were also impacted by the Medicare rate
reduction, as the fee schedules are linked to the Medicare fee
schedules. CHS estimates the 9.5% reduction for Medicare and
certain commercial payors negatively impacted net revenue for
the fiscal year ended December 31, 2009 by
$0.8 million. Additionally, the Medicare cap on
reimbursement for certain oxygen equipment impacted net revenue
for the first time, beginning January 1, 2009. CHS
estimates the cap has resulted in a decrease in net revenue of
$0.2 million for the fiscal year ended December 31,
2009.
Nursing revenue was $66.2 million for the fiscal years
ended December 31, 2008 and December 31, 2009. Private
duty nursing decreased due to restrictions that TennCare placed
on eligibility for private duty services effective
September 7, 2008. Additionally, Amerigroup, one of two
TPAs for TennCare in Middle Tennessee for private duty nursing,
decreased its private duty nursing rate effective August 1,
2008. The resulting reduction in private duty nursing hours and
rates contributed to a $3.7 million, or 15.8%, decrease in
private duty nursing revenue, from $23.4 million for the
fiscal year ended December 31, 2008 to $19.7 million
for the fiscal year ended December 31, 2009. This decrease
in private duty nursing revenue was substantially offset by
increases in skilled nursing revenue.
10
Cost of
goods (excluding depreciation and amortization)
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
Cost of goods (excluding depreciation and amortization)
|
$ | 81,995 | $ | 69,593 | $ | 12,402 | 17.8 | % | ||||||||
Percentage of net revenue
|
32.3 | % | 30.1 | % | ||||||||||||
(Dollars in thousands)
|
Total cost of goods (excluding depreciation and amortization)
increased from $69.6 million for the fiscal year ended
December 31, 2008 to $82.0 million for the fiscal year
ended December 31, 2009, an increase of $12.4 million
or 17.8%. The increase can be attributed to the increase in
product sales as noted above. Cost of goods represented 43.6% of
infusion net revenue for the fiscal year ended December 31,
2009, as compared to 42.3% for the fiscal year ended
December 31, 2008. Cost of goods represents pharmaceuticals
and supplies related to the infusion business. Cost of goods as
a percentage of revenue increased in 2009 as a result of changes
in CHSs payor and therapy mix.
Cost of
services provided
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
Cost of services provided
|
$ | 42,768 | $ | 42,365 | $ | 403 | 1.0 | % | ||||||||
Percentage of net revenue
|
16.8 | % | 18.4 | % | ||||||||||||
(Dollars in thousands)
|
Total cost of services provided increased from
$42.4 million for the fiscal year ended December 31,
2008 to $42.8 million for the fiscal year ended
December 31, 2009, an increase of $0.4 million or
1.0%. Cost of services provided represented 18.4% of total net
revenue for the fiscal year ended December 31, 2008 and
16.8% of total net revenue for the fiscal year ended
December 31, 2009.
Selling,
distribution and administrative expenses
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
Selling, distribution and administrative expenses
|
$ | 94,182 | $ | 88,650 | $ | 5,532 | 6.2 | % | ||||||||
Percentage of net revenue
|
37.1 | % | 38.4 | % | ||||||||||||
(Dollars in thousands)
|
Total selling, distribution and administrative expenses
increased from $88.7 million for the fiscal year ended
December 31, 2008 to $94.2 million for the fiscal year
ended December 31, 2009, an increase of $5.5 million
or 6.2%. The increase related primarily to salaries, payroll
taxes and benefits, and contract labor, which increased from
$57.9 million to $63.6 million (an increase of
$5.7 million). Selling, distribution and administrative
expenses as a percentage of net revenue decreased from 38.4% in
2008 to 37.1% in 2009 as CHS gained more operating efficiencies
from its increased scale.
Terminated
transaction costs
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
Terminated transaction costs
|
$ | | $ | 3,580 | $ | (3,580 | ) | (100.0 | )% | |||||||
Percentage of net revenue
|
0.0 | % | 1.6 | % | ||||||||||||
(Dollars in thousands)
|
11
Terminated transaction costs for the fiscal year ended
December 31, 2008 represents expense related to CHSs
termination of a stock purchase agreement in October 2008.
Interest
and other financing costs
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
Interest and other financing costs
|
$ | 7,337 | $ | 12,113 | $ | (4,776 | ) | (39.4 | )% | |||||||
Percentage of net revenue
|
2.9 | % | 5.2 | % | ||||||||||||
(Dollars in thousands)
|
Interest and other financing costs decreased from
$12.1 million for the fiscal year ended December 31,
2008 to $7.3 million for the fiscal year ended
December 31, 2009, a decrease of $4.8 million or
39.4%. As a percentage of net revenue, interest and other
financing costs decreased from 5.2% to 2.9% from 2008 to 2009.
Total interest-bearing debt decreased from $151.8 million
at December 31, 2008 to $140.8 million at
December 31, 2009, while the weighted-average interest rate
for the periods decreased from 7.0% to 4.3% from 2008 to 2009.
Provision
for income taxes
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
Provision for income taxes
|
$ | 9,208 | $ | 4,979 | $ | 4,229 | 84.9 | % | ||||||||
Percentage of net revenue
|
3.6 | % | 2.2 | % | ||||||||||||
(Dollars in thousands)
|
The provision for income taxes increased from $5.0 million
for the fiscal year ended December 31, 2008 to
$9.2 million for the fiscal year ended December 31,
2009. The provision represented 38.5% and 45.5% of income before
taxes for the fiscal years ended December 31, 2009 and 2008,
respectively. The decrease in the tax rate as a percentage of
income before taxes is primarily due to certain state income tax
planning measures adopted by CHS effective January 1, 2009.
Year
ended December 31, 2008 compared to the year ended
December 31, 2007
Net
revenue
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Home infusion net revenue
|
$ | 164,693 | $ | 131,356 | $ | 33,337 | 25.4 | % | ||||||||
Home nursing net revenue
|
66,175 | 62,497 | 3,678 | 5.9 | ||||||||||||
Total net revenue
|
$ | 230,868 | $ | 193,853 | $ | 37,015 | 19.1 | % | ||||||||
(Dollars in thousands)
|
Net revenue increased from $193.9 million for the year
ended December 31, 2007 to $230.9 million for the year
ended December 31, 2008, an increase of $37.0 million
or 19.1%. This change included an increase of
$33.3 million, or 25.4%, in infusion revenue from 2008 to
2009, during which time net revenue increased from
$131.4 million to $164.7 million. The increase was the
result of organic growth and the acquisition of Wilcox Medical
effective April 1, 2008, Infusion Partners of Lexington
effective September 1, 2008 and National Health Infusion
effective December 1, 2008. The acquisitions resulted in an
increase in infusion locations from 33 at December 31, 2007
to 36 at December 31, 2008. Nursing revenue increased from
$62.5 million for the year ended December 31, 2007 to
$66.2 million
12
for 2008, an increase of $3.7 million or 5.9%. The increase
in nursing net revenue resulted from organic growth, as CHS did
not acquire any nursing business during the period. While
skilled nursing revenue increased by $3.9 million, or 9.9%,
from the year ended December 31, 2007 to the year ended
December 31, 2008, private duty nursing revenue remained
relatively flat, contributing $23.6 million in net revenue
in 2007 as compared to $23.4 million in 2008. Private duty
nursing net revenue was impacted by certain restrictions that
TennCare placed on eligibility for private duty services
effective September 7, 2008. Additionally, Amerigroup, one
of two TPAs for TennCare in Middle Tennessee for private duty
nursing, decreased its private duty nursing rate effective
August 1, 2008.
Cost of
goods (excluding depreciation and amortization)
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Cost of goods (excluding depreciation and amortization)
|
$ | 69,593 | $ | 52,755 | $ | 16,838 | 31.9 | % | ||||||||
Percentage of net revenue
|
30.1 | % | 27.2 | % | ||||||||||||
(Dollars in thousands)
Total cost of goods (excluding depreciation and amortization)
increased from $52.8 million for the year ended
December 31, 2007 to $69.6 million for the year ended
December 31, 2008, an increase of $16.8 million or
31.9%. The increase can be attributed to the increase in product
sales as noted above. Cost of goods represented 42.3% of
infusion net revenue for the year ended December 31, 2008,
as compared to 40.2% for the year ended December 31, 2007.
Cost of goods as a percentage of revenue increased in 2008 as a
result of changes in CHSs payor and therapy mix. Cost of
goods represents pharmaceuticals and supplies related to the
infusion business.
Cost of
services provided
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Cost of services provided
|
$ | 42,365 | $ | 42,591 | $ | (226 | ) | (0.5 | )% | |||||||
Percentage of net revenue
|
18.4 | % | 22.0 | % | ||||||||||||
(Dollars in thousands)
Total cost of services provided decreased from
$42.6 million for the year ended December 31, 2007 to
$42.4 million for the year ended December 31, 2008, a
decrease of $0.2 million or 0.5%. Cost of services provided
represented 22.0% of total net revenue for the year ended
December 31, 2007 and 18.4% of total net revenue for the
year ended December 31, 2008.
Selling,
distribution and administrative expenses
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Selling, distribution and administrative expenses
|
$ | 88,650 | $ | 72,071 | $ | 16,579 | 23.0 | % | ||||||||
Percentage of net revenue
|
38.4 | % | 37.2 | % | ||||||||||||
(Dollars in thousands)
Total selling, distribution and administrative expenses
increased from $72.1 million for the year ended
December 31, 2007 to $88.7 million for the year ended
December 31, 2008, an increase of $16.6 million or
23.0%. The increase related primarily to salaries, payroll taxes
and benefits, and
13
contract labor, which increased from $47.1 million to
$57.9 million (an increase of $10.8 million), patient
mileage expense, which increased from $1.5 million to
$3.7 million (an increase of $2.2 million) and bad
debt expense, which increased from $4.6 million to
$6.2 million (an increase of $1.6 million). The
increase in bad debt expense relates to the overall growth in
the business and the bad debt provision for certain legacy
accounts receivable balances. Selling, distribution and
administrative expenses as a percentage of net revenue increased
from 37.2% in 2007 to 38.4% in 2008.
Terminated
transaction costs
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Terminated transaction costs
|
$ | 3,580 | $ | 4,379 | $ | (799 | ) | (18.2 | )% | |||||||
Percentage of net revenue
|
1.6 | % | 2.3 | % | ||||||||||||
(Dollars in thousands)
Terminated transaction costs for the year ending
December 31, 2008 represents expense related to CHSs
termination of a stock purchase agreement in October 2008. In
2007, CHS expensed $4.4 million related to its 2007 public
offering, which was withdrawn in January 2008.
Interest
and other financing costs
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Interest and other financing costs
|
$ | 12,114 | $ | 15,324 | $ | (3,210 | ) | (20.9 | )% | |||||||
Percentage of net revenue
|
5.2 | % | 7.9 | % | ||||||||||||
(Dollars in thousands)
Interest and other financing costs decreased from
$15.3 million for the year ended December 31, 2007 to
$12.1 million for the year ended December 31, 2008, a
decrease of $3.2 million or 20.9%. As a percentage of net
revenue, interest and other financing costs decreased from 7.9%
to 5.2% from 2007 to 2008. Total interest-bearing debt decreased
from $154.8 million at December 31, 2007 to
$151.8 million at December 31, 2008, while the
weighted-average interest rate for the periods decreased from
9.4% for 2007 to 7.0% for 2008.
Provision
for income taxes
Year Ended |
Increase/ |
|||||||||||||||
December 31, | Decrease | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Provision for income taxes
|
$ | 4,979 | $ | 2,328 | $ | 2,651 | 113.9 | % | ||||||||
Percentage of net revenue
|
2.2 | % | 1.2 | % | ||||||||||||
(Dollars in thousands)
The provision for income taxes increased from $2.3 million
for the year ended December 31, 2007 to $5.0 million
for the year ended December 31, 2008. The provision
represented 45.5% and 59.1% of income before taxes for the year
ended December 31, 2008 and 2007, respectively. The
decrease in the tax rate as a percentage of income before taxes
is primarily due to certain state income tax planning measures
adopted by CHS in early 2008. The tax rate was higher in 2007
due to certain costs that were not deductible for state income
tax purposes.
14
Year
ended December 31, 2007
Net
revenue
Year Ended |
||||||||
December 31, 2007 | ||||||||
Amount | % of Total | |||||||
Home infusion net revenue
|
$ | 131,356 | 67.8 | % | ||||
Home nursing net revenue
|
62,497 | 32.2 | ||||||
Total net revenue
|
$ | 193,853 | 100.0 | % | ||||
(Dollars in thousands)
CHSs net revenue was $193.9 million for the year
ended December 31, 2007. Its home infusion net revenue
totaled $131.4 million, or 67.8% of its net revenue for the
period. Net revenue in CHSs home infusion segment for the
year ended December 31, 2007 benefited from its
acquisitions of Deaconess in January 2007, Infusion Solutions in
March 2007, Applied in June 2007, Infusion Partners of Brunswick
and Infusion Partners of Melbourne in July 2007 and East Goshen
Pharmacy in August 2007. During this period, CHSs
operations grew from 10 locations in four states to 33 locations
in 14 states.
CHSs home nursing net revenue totaled $62.5 million,
or 32.2% of its net revenue for the period. Net revenue in its
home nursing segment during this period is solely attributable
to CHSs acquisition of Deaconess in January 2007. During
the year ended December 31, 2007, CHSs home nursing
segment provided over 348,000 nursing and therapy visits and
over 590,000 private duty nursing hours to patients in the home.
As of December 31, 2007, CHS had 3,162 active nursing
patients in three states.
Cost of
goods and cost of services
Cost of goods for CHSs home infusion segment was
$52.8 million for the year ended December 31, 2007, or
40.2% of its home infusion segment net revenue. Cost of goods
relates solely to CHSs home infusion segment and consisted
primarily of the cost of pharmaceuticals, supplies and
equipment. As noted above, CHSs net revenue benefited
during the period from the acquisitions of Deaconess, Infusion
Solutions, Applied, Infusion Partners of Brunswick, Infusion
Partners of Melbourne and East Goshen Pharmacy. This resulted in
a corresponding increase in the cost of goods and services
provided during the period. As of December 31, 2007, CHS
employed 688 employees and operated 33 home infusion
locations in its home infusion segment.
Cost of services for CHSs home infusion segment consisted
primarily of direct patient care salaries, payroll taxes,
employee benefits and contract labor, which totaled
$13.9 million and accounted for 10.6% of net revenue in
this segment during this period. This growth was the result of
organic growth as well as CHSs acquisition of Deaconess,
Infusion Solutions, Applied, Infusion Partners of Brunswick,
Infusion Partners of Melbourne and East Goshen Pharmacy during
this period.
Cost of services for CHSs home nursing segment consisted
primarily of direct patient care salaries, payroll taxes,
employee benefits and contract labor, which totaled
$28.7 million and accounted for 46.0% of net revenue in
this segment during this period. As of December 31, 2007,
CHS operated 32 home nursing locations in its home nursing
segment. As noted above, CHS acquired all of the business in its
home nursing segment through the Deaconess acquisition.
Selling,
distribution and administrative expense
Selling, distribution and administrative expense for the year
ended December 31, 2007 was $72.1 million, or 37.3% of
net revenue. Selling, distribution and administrative expense
consists
15
primarily of $42.9 million of salaries, payroll taxes and
benefits, $4.6 million of provision for bad debt and
$4.5 million of employee travel, which accounted for 22.1%,
2.4% and 2.3%, respectively, of net revenue during this period.
CHSs selling, distribution and administrative costs
increased as a result of the acquisitions of Deaconess, Infusion
Solutions, Applied, Infusion Partners of Brunswick, Infusion
Partners of Melbourne and East Goshen Pharmacy.
Depreciation
and amortization
Depreciation and amortization expense for the year ended
December 31, 2007 was $3.4 million, or 1.8% of net
revenue. Depreciation expense for this period related to
property and equipment totaled $3.0 million, and
amortization of capital lease assets totaled $0.4 million.
Stock
issuance expense
Stock issuance expense for the year ended December 31, 2007
was $4.4 million, or 2.3% of net revenue. Stock issuance
costs related to CHSs withdrawal of filing its initial
public offering with the SEC.
Interest
expense
Interest expense for the year ended December 31, 2007 was
$15.3 million, or 7.9% of net revenue. Interest expense
reflects primarily the cost of CHSs borrowings under its
first lien credit facility and its second lien term loan during
the period. The effective rate of these borrowings for the year
ended December 31, 2007 was 9.39%. CHSs indebtedness
increased due to its borrowings for the acquisitions of
Deaconess, Infusion Solutions, Infusion Partners of Brunswick
and Melbourne and East Goshen Pharmacy. CHS financed
approximately 72.7% of the cash purchase price payable at
closing for the Deaconess, Infusion Solutions acquisitions,
Infusion Partners of Brunswick and Melbourne and East Goshen
Pharmacy, while it financed approximately 53.3% of the cash
purchase price payable at closing for the New England Home
Therapies and Specialty Pharma acquisitions.
Other
income
Other income for the year ended December 31, 2007 was
$0.6 million, or less than 1% of net revenue.
Provision
for income taxes
Provision for income taxes for the year ended December 31,
2007 was $2.3 million, or 1.2% of net revenue. This
represents an effective tax rate of 59.1% and includes federal
and state income tax provisions. CHSs effective tax rate
is based on expected income, statutory tax rates and tax
planning opportunities available to it in the various
jurisdictions in which it operates.
Seasonality
Although CHSs results of operations are not affected to a
material extent by seasonal variations in demand for its
products or services, a small number of its products, however,
are subject to fluctuations in demand due to seasonality. For
example, Respiratory Syncytial Virus, or RSV, treatments are of
a seasonal nature because RSV season lasts from approximately
October through April each year. As a result, CHSs net
revenue from Synagis is higher during the first and fourth
quarters of each year than during the second and third quarters
of each year. Net revenue from Synagis accounted for
approximately 5.2% and 4.4% of total net revenue for the fiscal
years ended December 31, 2009 and 2008, respectively.
16
Liquidity and
Capital Resources
Overview
CHS has financed its operations through cash provided
by operating activities, private sales of shares of CHSs
common and preferred stock and borrowings under its first lien
credit facility and its second lien term loan. These sources of
financing have been CHSs principal sources of liquidity to
date. In connection with the acquisition, we plan to repay
CHSs outstanding indebtedness, including the first lien
credit facility, the second lien term loan and CHSs
$2.25 million 8% note due on December 31, 2010, and to
enter into the New Credit Facility.
CHS is a holding company with no material business operations.
CHSs most significant asset is the capital stock of its
subsidiary Critical Homecare Solutions, Inc., which is itself a
holding company. CHS conducts virtually all of its business
operations through the direct and indirect subsidiaries of
Critical Homecare Solutions, Inc. Accordingly, CHSs only
material sources of cash are dividends or other distributions or
payments that are derived from earnings and cash flow generated
by these subsidiaries. In addition, CHSs credit facilities
have restricted the ability of Critical Homecare Solutions, Inc.
to make dividends or other distributions to CHS. Critical
Homecare Solutions, Inc. has been dependent on its subsidiaries
to generate sufficient funds to service its substantial
indebtedness, which is secured by substantially all of
CHSs assets, including the common stock of Critical
Homecare Solutions, Inc.s subsidiaries.
Cash
Flows
As of December 31, 2009, CHS had cash and cash equivalents
of $10.1 million.
Net cash flow provided by operating activities increased to
$27.9 million for the fiscal year ended December 31,
2009 from $1.8 million for the fiscal year ended
December 31, 2008. This $26.1 million increase was
primarily due to a change in operating activities and accounts
receivable during the respective periods. The change in cash
provided by operating activities is due primarily to
acquisitions completed during the respective periods, a decrease
in accounts receivable and a decrease in interest and other
financing costs. Cash flows include results for the Wilcox
Medical acquisition effective April 1, 2008, the Infusion
Partners of Lexington acquisition effective September 1,
2008, the National Health Infusion acquisition effective
December 1, 2008 and the Option Health acquisition
effective June 1, 2009. Interest and other financing costs
decreased due to additional repayments of long term debt and a
decrease in the weighted-average interest rate from 7.04% for
the fiscal year ended December 31, 2008 to 4.35% for the
fiscal year ended December 31, 2009. Accounts receivable
provided net cash of $5.2 million for the fiscal year ended
December 31, 2009, whereas accounts receivable for the
fiscal year ended December 31, 2008 used $11.0 million
in net cash. Days sales outstanding, net of reserves, decreased
from 73 days at December 31, 2008 to 58 days at
December 31, 2009.
Net cash used in investing activities decreased to
$9.5 million for the fiscal year ended December 31,
2009 from $19.9 million for the fiscal year ended
December 31, 2008. This $10.4 million decrease
primarily resulted from a decrease in payments for business
acquisitions and a decrease in repayment of amounts due to
sellers. These changes were due to a decrease in the number of
business acquisitions from 2008 to 2009. During the fiscal year
ended December 31, 2009, CHS acquired one business for cash
of $6.3 million. During the fiscal year ended
December 31, 2008, CHS acquired three businesses for cash
of $14.5 million.
17
Net cash used in financing activities was $8.6 million for
the fiscal year ended December 31, 2009 compared to net
cash provided of $16.7 million for the fiscal year ended
December 31, 2008. This $25.3 million decrease was
primarily due to decreased proceeds from borrowings, decreased
proceeds from the issuance of preferred stock and increased
repayment of long term debt. Proceeds from borrowings and
proceeds from the issuance of preferred stock decreased due to
decreased payments for business acquisitions. Repayment of long
term debt increased by $3.4 million as increased cash
provided by operating activities allowed CHS to repay all
borrowings under its revolving credit facility in 2009.
Capital Expenditures. CHS had capital expenditures
of $3.2 million during the fiscal year ended
December 31, 2009 and $3.7 million during the fiscal
year ended December 31, 2008. Capital expenditures in each
period related primarily to purchases of medical equipment and
vehicles.
In the absence of future significant acquisitions, CHS expects
to incur approximately $4.0 million of non-acquisition related
capital expenditures in 2010. CHS expects capital expenditures
will be primarily to purchase medical equipment and vehicles. In
the Merger Agreement, CHS has agreed that it will not make
capital expenditures of more than $1 million in any quarter
without the approval of BioScrip.
Credit
Facilities
CHS has historically financed a portion of its operations
through its first lien credit facility and second lien term
loan. In connection with our acquisition of CHS, we plan to
repay CHSs outstanding indebtedness, including the first
lien credit facility, the second lien term loan and the
8% note payable, terminate CHSs existing credit
facilities, and enter into the New Credit Facility.
Commitments
and Contingencies
The following table sets forth CHSs contractual
obligations as of December 31, 2009 before giving effect to
the Transactions:
Payments Due by Period | ||||||||||||||||||||||||
Total | 2010 | 2011 | 2012 | 2013 | Thereafter | |||||||||||||||||||
Long Term Debt Obligations
|
$ | 140,458 | $ | 10,917 | $ | 11,557 | $ | 83,984 | $ | 34,000 | | |||||||||||||
InterestLong Term Debt Obligations*
|
13,714 | 5,873 | 5,372 | 2,393 | 76 | | ||||||||||||||||||
Capital Lease Obligations
|
353 | 138 | 117 | 79 | 20 | | ||||||||||||||||||
Operating Lease Obligations
|
7,628 | 3,188 | 2,190 | 1,513 | 721 | 18 | ||||||||||||||||||
InterestCapital Lease Obligations
|
24 | 10 | 8 | 5 | 1 | | ||||||||||||||||||
Total
|
$ | 162,177 | $ | 20,126 | $ | 19,243 | $ | 87,974 | $ | 34,818 | 18 | |||||||||||||
(In thousands)
|
* | Computed using interest rates in effect as of December 31, 2009. |
The Company has letters of credit against the first lien
facilities securing its performance on its workers
compensation insurance policies which total $1.5 million as
of March 15, 2010.
The letters of credit expire on January 8, 2011, and have
an automatic extension of one year.
The Company has a letter of credit against the first lien
facilities of $75,000 securing its performance under a vehicle
lease agreement. The letter of credit expires on August 7,
2010.
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Inflation
CHS is impacted by rising costs for certain inflation-sensitive
operating expenses such as vehicle fuel, labor and employee
benefits. CHS believes that inflation will not have a material
effect on its business but may have an impact on its future
financial results.
Off-Balance Sheet
Arrangements
As of December 31, 2009, CHS had no off-balance sheet
arrangements or obligations.
Quantitative and
Qualitative Disclosures About Market Risk
Interest
rate risk
Based on the variable-rate debt in CHSs debt portfolio at
December 31, 2009, a one percent increase or decrease in
interest rates would increase or decrease, respectively,
CHSs interest expense by $1.4 million on an annual
basis.
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